The Opaqueness of Structured Bonds: Evidence from the U.S. Insurance Industry

Sojung Carol Park (), Jean Lemaire () and Xiaoying Xie ()
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Sojung Carol Park: Seoul National University
Jean Lemaire: University of Pennsylvania
Xiaoying Xie: California State University, Fullerton

The Geneva Papers on Risk and Insurance - Issues and Practice, 2016, vol. 41, issue 4, No 6, 650-676

Abstract: Abstract It has been argued that the opaqueness of structured bonds, such as mortgage-backed securities, asset-backed securities and collateral debt obligations, was one of the major causes of the recent financial crisis that started in late 2007. We analyse the evolving nature of information asymmetry inherent in various types of structured bonds by examining the U.S. insurers’ assets. We show that, prior to 2004, structured bonds were not associated with greater information asymmetry; however, holding more multi-class structured bonds, especially privately placed bonds, increased the information asymmetry when evaluating insurers’ assets post-2004. The effect of information asymmetry was more significant with life insurers than with non-life insurers. In addition, by investigating the rating grades of such structured bonds, we find that the market views higher-grade, privately placed, multi-class structured bonds as having the highest information asymmetry among all types of structured bonds post 2004, an effect which is, again, more significant with life insurers. This result shows that structuring complexities and unreliable ratings make structured bonds more opaque than just securitisation itself.

Keywords: structured bonds; information asymmetry; insurance; bid–ask spread; financial crisis; G01; G22; G24; G28 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1057/s41288-016-0021-4

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