Debt Market Responses to Longevity Shocks

64 Pages Posted: 2 Aug 2021 Last revised: 27 Oct 2021

See all articles by Zhanhui Chen

Zhanhui Chen

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Vidhan K. Goyal

HKUST; Hong Kong University of Science & Technology (HKUST) - Department of Finance; Hong Kong University of Science & Technology (HKUST) - Department of Finance

Pingyi Lou

Fudan University - School of Economics

Wenjun Zhu

Nanyang Business School, Nanyang Technological University

Date Written: July 30, 2021

Abstract

Unexpected increases in life expectancy induce life insurers to extend the duration of their assets, which results in significant purchases of long-term corporate bonds. We show that this variation in life insurer demand for bonds of specific maturities has real-economy consequences for corporate sector financing and investment policies. As longevity increases, long-term bond yields fall and the corporate sector absorbs such shocks by issuing more long-term bonds, while simultaneously increasing investments in long-term assets. The effects are particularly marked where life insurers are the primary holders of a firm’s debt. The response is also more pronounced for firms that rely on long-term financing, and financially unconstrained firms.

Keywords: debt maturity, longevity risk, life insurers, bond yields, duration

JEL Classification: G12, G22, G32, J11

Suggested Citation

Chen, Zhanhui and Goyal, Vidhan K. and Goyal, Vidhan K. and Lou, Pingyi and Zhu, Wenjun, Debt Market Responses to Longevity Shocks (July 30, 2021). Nanyang Business School Research Paper No. 21-35, Available at SSRN: https://ssrn.com/abstract=3896198 or http://dx.doi.org/10.2139/ssrn.3896198

Zhanhui Chen (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Vidhan K. Goyal

HKUST ( email )

Clear Water Bay
Kowloon
Hong Kong
23587678 (Phone)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Pingyi Lou

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Wenjun Zhu

Nanyang Business School, Nanyang Technological University ( email )

50 Nanyang Avenue
Singapore, 639798
Singapore
(65) 6592-1859 (Phone)

HOME PAGE: http://sites.google.com/view/wenjun-zhu

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