Debt Market Responses to Longevity Shocks
64 Pages Posted: 2 Aug 2021 Last revised: 27 Oct 2021
Date Written: July 30, 2021
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: Suggested Citation