Abstract

https://ssrn.com/abstract=2810553
 


 



Asset Insulators


Gabriel Chodorow-Reich


Harvard University Department of Economics

Andra C. Ghent


University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Valentin Haddad


Princeton University - Bendheim Center for Finance

May 28, 2016

2nd Annual Financial Institutions, Regulation and Corporate Governance Conference

Abstract:     
We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We illustrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 10 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.

Number of Pages in PDF File: 57

JEL Classification: G01, G11, G22, G23


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Date posted: July 19, 2016 ; Last revised: October 2, 2016

Suggested Citation

Chodorow-Reich, Gabriel and Ghent, Andra C. and Haddad, Valentin, Asset Insulators (May 28, 2016). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=2810553

Contact Information

Gabriel Chodorow-Reich
Harvard University Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
6174963226 (Phone)
6174963226 (Fax)
HOME PAGE: http://scholar.harvard.edu/chodorow-reich
Andra C. Ghent (Contact Author)
University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )
School of Business
975 University Avenue
Madison, WI 53706
United States
Valentin Haddad
Princeton University - Bendheim Center for Finance ( email )
United States
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