The Role of Financial Conditions in Portfolio Choices: The Case of Insurers / Shan Ge, Michael S. Weisbach.

Format:

Book

Author/Creator:

Ge, Shan.

Contributor:

National Bureau of Economic Research.

Weisbach, Michael S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25677.

NBER working paper series no. w25677

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Role of Financial Conditions in Portfolio Choices

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

Many institutional investors depend on the returns they generate to fund their operations and liabilities. How do these investors' financial conditions affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather events that help us establish causality. Among corporate bonds, for which we can control for regulatory treatment, results suggest that when Property & Casualty (P&C) insurers become more constrained due to operating losses, they shift towards safer bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for losses with weather shocks. The change in allocations following losses is larger for smaller or worse-rated insurers and during the financial crisis, suggesting that the shift toward safer securities is driven by concerns about financial flexibility. The results highlight the importance of financial conditions in institutional investors' portfolio decisions.

Notes:

Print version record

March 2019.