Understanding the Ownership Structure of Corporate Bonds / Ralph S. J. Koijen, Motohiro Yogo.

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Koijen, Ralph S. J

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w29679.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing model with leverage-constrained households and institutional investors. Insurers have relatively cheap access to leverage through their underwriting activity. They hold a leveraged portfolio of low-beta assets in equilibrium, relaxing other investors' leverage constraints. The model explains recent empirical findings on insurers' portfolio choice and its impact on asset prices.

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January 2022.

Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing model with leverage-constrained households and institutional investors. Insurers have relatively cheap access to leverage through their underwriting activity. They hold a leveraged portfolio of low-beta assets in equilibrium, relaxing other investors' leverage constraints. The model explains recent empirical findings on insurers' portfolio choice and its impact on asset prices.