Does operating risk affect portfolio risk? Evidence from insurers' securities holding

Xuanjuan Chen, Zhenzhen Sun, Tong Yao and Tong Yu

Journal of Corporate Finance, 2020, vol. 62, issue C

Abstract: This study empirically examines, in the setting of insurance companies, the hypothesis that investors facing more operating risk may behave as if they were more risk averse in investment decisions. Specifically, we study how operating risk from underwriting insurance policies affects insurers' risk taking behavior in their portfolio investments. We find that insurers with higher volatilities in underwriting incomes and cash flows are more conservative in their financial investment risk taking – they have lower credit risk exposure in their bond investments, as well as lower portfolio weights on risky bonds and equities. Further, insurers' portfolio risk exposure is sensitive to the risk of permanent underwriting income shocks but insensitive to the risk of transitory shocks. Transitory operating risk, however, is significantly related to portfolio risk when insurers face tight financing constraints. Our findings suggest a substitutive effect of operating risk on investment decisions by financial institutions.

Keywords: Operating risk; Investment risk; Credit risk; Financing constraints (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:62:y:2020:i:c:s0929119920300237

DOI: 10.1016/j.jcorpfin.2020.101579

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