Duration-Hedging Trades, Return Momentum and Reversal
59 Pages Posted: 28 Feb 2020 Last revised: 23 Aug 2021
Date Written: December 1, 2019
We study the duration-hedging trades of duration-sensitive strategic investors, i.e., pensions and life insurers. We use longevity shocks to identify their duration-hedging trades. Longevity shocks affect these investors' liability duration and induce them to adjust their asset duration. When longevity shocks are low (high), they buy more short- (long-) duration stocks and sell more long- (short-) duration stocks. Because prior winners (losers) have shorter (longer) duration, they behave like momentum (contrarian) traders when longevity shocks are low (high). We further verify this channel using capital flows and cross-state longevity variations.
Keywords: momentum; stock duration; longevity risk; pensions; life insurers
JEL Classification: G11, G12, G22, H55, J11, J32
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