Asset Insulators

Gabriel Chodorow-Reich, Andra Ghent and Valentin Haddad

No 24973, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G01 G1 G14 G22 G32 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-ias and nep-rmg
Note: AP CF EFG ME
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Published as Gabriel Chodorow-Reich & Andra Ghent & Valentin Haddad & Ralph Koijen, 2021. "Asset Insulators," The Review of Financial Studies, vol 34(3), pages 1509-1539.

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Journal Article: Asset Insulators (2021)
Working Paper: Asset Insulators (2016)
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