Interest Rates and Insurance Company Investment Behavior

57 Pages Posted: 12 Nov 2019 Last revised: 20 Jan 2020

See all articles by Ali K. Ozdagli

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston

Zixuan (Kevin) Wang

Harvard Business School

Date Written: March 31, 2019

Abstract

Life insurance companies, the largest institutional holders of corporate bonds, tilt their portfolios towards higher-yield bonds when interest rates decline. This tilt seems to be primarily driven by an increase in duration rather than credit risk and insurers do not seem to increase the credit risk of their bonds as interest rates decline. Moreover, the duration gap between their assets and liabilities deviates from zero for extended periods of time in either direction. These patterns cannot be explained by incentives to reach for yield. We propose a new model of duration-matching under adjustment costs that conforms with these patterns and test other implications of this model. The gradual duration matching poses financial stability challenges distinct from reaching for yield.

Keywords: corporate bonds, interest rates, life insurance companies, duration matching

JEL Classification: G11, G22, G23

Suggested Citation

Ozdagli, Ali K. and Wang, Zixuan (Kevin), Interest Rates and Insurance Company Investment Behavior (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=3479663 or http://dx.doi.org/10.2139/ssrn.3479663

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

HOME PAGE: http://sites.google.com/site/ozdagli/

Zixuan (Kevin) Wang (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
41
Abstract Views
268
PlumX Metrics