Asset Insulators / Gabriel Chodorow-Reich, Andra Ghent, Valentin Haddad.

Format:

Book

Author/Creator:

Chodorow-Reich, Gabriel.

Contributor:

National Bureau of Economic Research.

Ghent, Andra.

Haddad, Valentin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24973.

NBER working paper series no. w24973

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We demonstrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers' holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 15 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.

Notes:

Print version record

August 2018.