Portfolio Similarity and Asset Liquidation in the Insurance Industry

Girardi, Giulio; Hanley , Kathleen Weiss; Nikolova, Stanislava (Stas); Pelizzon, Loriana; Getmansky Sherman, Mila

doi:10.2139/ssrn.3050561

Portfolio Similarity and Asset Liquidation in the Insurance Industry

54 Pages Posted: 10 Oct 2017 Last revised: 14 Aug 2018

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

There are 2 versions of this paper

Date Written: July 30, 2018

Abstract

An important assumption underlying the designation of some insurers as systemically important is that their overlapping portfolio holdings can result in common selling. We measure the overlap in holdings using cosine similarity, and show that insurers with more similar portfolios have larger subsequent common sales. This relationship can be magnified for some insurers when they are regulatory capital constrained or markets are under stress. When faced with an exogenous liquidity shock, insurers with greater portfolio similarity have even larger common sales that impact prices. Our measure can be used by regulators to predict which institutions may contribute most to financial instability through the asset liquidation channel of risk transmission.

Keywords: Interconnectedness, Asset Liquidation, Similarity, Financial Stability, Insurance Companies, SIFI

JEL Classification: G11, G18, G2

Suggested Citation: Suggested Citation

Girardi, Giulio and Hanley, Kathleen Weiss and Nikolova, Stanislava (Stas) and Pelizzon, Loriana and Getmansky Sherman, Mila, Portfolio Similarity and Asset Liquidation in the Insurance Industry (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=3050561 or http://dx.doi.org/10.2139/ssrn.3050561