Foreign Investments of Japanese Life Insurance Companies
Posted: 5 Oct 2016 Last revised: 24 Sep 2018
Date Written: September 17, 2018
This paper investigates the relationship between the investment returns or volatilities of Japanese life insurance companies and their discretionary decisions on foreign portfolio investments. These decisions include the proportion of foreign investments in the entirety of the companies’ proprietary investments as well as the currency risk hedge. We also consider the “carry trade” scenario, which occurs when the market favors investing in high-yield currencies by borrowing the Japanese yen. We establish three important results. First, the currency hedge relates positively to the investment returns under the carry trade scenario but relates negatively otherwise. Second, the proportion of foreign investments relates positively to the investment returns. Third, the investment returns significantly decrease under the carry trade scenario.
Keywords: Japanese life insurance company, Foreign investments, Currency hedge, Carry trade, Implied volatility
JEL Classification: F31, G22
Suggested Citation: Suggested Citation