The Bond Pricing Implications of Rating-Based Capital Requirements

126 Pages Posted: 28 Jun 2017 Last revised: 22 May 2019

See all articles by Scott Murray

Scott Murray

Georgia State University

Stanislava Nikolova

University of Nebraska - Lincoln

Date Written: May 17, 2019


This paper demonstrates that rating-based capital requirements, through their impact on insurers' investment demand, affect corporate bond prices. Consistent with insurers’ low demand for investment-grade (IG) bonds with a rating close to non-investment-grade, these bonds are underpriced. Consistent with insurers’ high (low) demand for IG bonds with high (low) systematic risk exposure, these bonds are overpriced (underpriced). Insurer demand, measured by insurer holdings, explains most of these pricing effects. We identify rating-based capital requirements as the driver of insurer demand, and thus the pricing effects, by showing that the effects do not exist before these requirements' implementation in 1993.

Keywords: Risk-based capital, regulatory arbitrage, insurance companies, corporate bonds, credit ratings, systematic risk, asset pricing

JEL Classification: G11, G12, G14, G21, G22, G28

Suggested Citation

Murray, Scott and Nikolova, Stanislava, The Bond Pricing Implications of Rating-Based Capital Requirements (May 17, 2019). 14th Annual Mid-Atlantic Research Conference in Finance (MARC). Available at SSRN: or

Scott Murray

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Stanislava Nikolova (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588-0490
United States
402-472-6049 (Phone)

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