Interest Rates and Insurance Company Investment Behavior

56 Pages Posted: 12 Nov 2019 Last revised: 8 Sep 2020

See all articles by Ali K. Ozdagli

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Dallas

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 Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Zixuan (Kevin) Wang (Contact Author)

Harvard Business School ( email )

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

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