 Correlated Trading by Life Insurers and Its Impact on Bond PricesChia‐Chun Chiang and Greg Niehaus Journal of Risk & Insurance, 2020, vol. 87, issue 3, 597-625 Abstract: Our evidence indicates that U.S. life insurers’ decisions to buy and sell individual corporate bonds are correlated across companies within the life insurance industry. On average, the correlation in sell decisions is greater in smaller bonds, bonds with lower ratings, bonds that have been downgraded, and bonds that have recently experienced relatively large abnormal returns. Correlated trading was also elevated during the financial crisis. In addition, correlated buying and selling are greater when insurers designated as systemically important financial institutions are actively trading. We also find that the bonds that insurers sell in a correlated manner exhibit negative average abnormal returns during the quarter in which insurers are selling. One explanation is that insurers’ correlated selling is temporarily pushing bond prices below their fundamental value. In this case, we would expect prices to bounce back in the subsequent quarter. However, we do not find a rebound in prices and therefore our evidence supports the alternative explanation that insurers’ correlated selling is impounding information into bond prices. Date: 2020 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:87:y:2020:i:3:p:597-625 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Risk & Insurance is currently edited by Joan T. Schmit More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC. |
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