Rainy Day Liquidity

58 Pages Posted: 3 Jun 2019 Last revised: 7 Sep 2021

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Xin Li

Michigan Technological University - College of Business

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: May 12, 2019

Abstract

This study considers the role of life insurers as "rainy day" liquidity providers who help improve liquidity in stressful conditions. We show that on average insurers have positive liquidity supply scores in years following the 2007-09 financial crisis and that such positive liquidity supply scores are mainly driven by insurers' buy-side transactions. Cross sectionally, liquidity supply scores of individual insurers are higher for insurers with sufficient capital and high cash flow. We also find that in stressful periods such as the financial crisis and Dodd-Frank Act era, corporate bonds purchased more by high liquidity supply score insurers indeed experience liquidity improvement. In addition, high liquidity provision insurers are more likely to purchase downgraded bonds including fallen angels.

Keywords: Liquidity provision, Market liquidity, Corporate bonds, Funding liquidity, Life insurance

JEL Classification: G11, G22

Suggested Citation

Huang, Jing-Zhi Jay and Li, Xin and Saglam, Mehmet and Yu, Tong, Rainy Day Liquidity (May 12, 2019). Available at SSRN: https://ssrn.com/abstract=3387065 or http://dx.doi.org/10.2139/ssrn.3387065

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Xin Li (Contact Author)

Michigan Technological University - College of Business ( email )

1400 Townsend Dr
Academic Office Building
Houghton, MI 49931
United States

Mehmet Saglam

University of Cincinnati - Department of Finance - Real Estate ( email )

Carl H. Lindner College of Business
Cincinnati, OH 45221
United States
(513) 556-9108 (Phone)

HOME PAGE: http://homepages.uc.edu/~saglammt/

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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