PhD Candidate in Finance London Business School
I am on the 2018/2019 academic job market and will be available for interviews at the AFA/ ASSA meetings in Atlanta.
Research Areas: Financial Intermediation; Insurance Markets; Credit Risk; Corporate Finance
Email: firstname.lastname@example.org Mobile: +44 (0) 783 1964 521
Regulatory Limits to Risk Management (Job Market Paper)
- AQR Asset Management Institute Award 2018 (Winner)
Abstract: I construct a long history of risk exposures from derivatives using detailed position-level data on interest rate and equity instruments to show that inconsistencies in regulation distort the hedging choices of US life insurers. I exploit a shift in the regulation that provides inconsistent incentives to hedge economically similar products due to differences in the sensitivity of regulatory capital to movements in interest rates. I show that hedging increases and becomes more sensitive to interest rate fluctuations for insurers that underwrite products that became risk sensitive under the new regulation. However, insurers that underwrite products that have similar economic exposures but no regulatory sensitivity to interest rates do not increase hedging but instead increase off-balance sheet transfers through reinsurance. Consistent with regulation limiting hedging choices, tighter regulatory constraints lead to lower hedging. Using actual data on collateral posted to counter-parties, I show that lower hedging is not due to collateral constraints. My findings have implications for the fragility of life insurers going forward as regulation interacts with monetary policy in a way that makes the framework insensitive when interest rates rise.
Presentations: European Finance Association (EFA) Doctoral Tutorial (Warsaw); Bank of England; London Business School; 6th Emerging Scholars Conference in Banking and Finance (Cass Business School)*
Co-author: David Humphry (Bank of England)
Abstract: This paper examines the impact of the introduction of a risk-based capital regulation regime in 2002 on product market outcomes for the insurance industry in the UK. Using proprietary data on stress-test submissions from the Bank of England, we develop a measure of firm-level shocks to regulatory constraints that is plausibly exogenous to shifts in insurance demand. We find that constrained firms reduced underwriting relative to unconstrained firms, particularly for traditional insurance products which became more capital intensive in the new regulatory regime. The reduction in underwriting was not as pronounced for linked products, products that are mainly investment vehicles like mutual funds, implying a shift in the equilibrium product mix from traditional to linked. We also show that a higher proportion of constrained firms restructured their balance sheets by transferring assets and liabilities and went through reorganizations i.e. a change in legal owner of the firm.
Presentations: American Finance Association (AFA) Annual Conference (Chicago); Becker Friedman Institute – Macro Financial Modeling Summer Session (Bretton Woods); Trans-Atlantic Doctoral Conference (London); Bank of England; London Business School
Works in Progress
Pricing Corporate Bonds: An Institutional Approach
Abstract: This paper examines whether the institutional pricing model implied by an insurance fund manager's portfolio optimization problem prices the cross-section of corporate bond returns. I present a stylized portfolio choice problem of an insurance company which faces realistic regulatory risk constraints. I test this model for the corporate bond market using data on insurance companies' balance-sheet and corporate bond returns and study the model's implications on asset prices, manager's incentives, and risk preferences. I find that both aggregate fluctuations in balance-sheet assets and dispersion of shocks across firms matter for asset pricing. I also show that the manager's incentives with respect to regulatory capital charge of an asset is large and statistically significant and establish that the marginal value of regulatory capital charge is time-varying and increases during economic downturns.
Presentations: London Business School
Demand for Illiquid Assets
Co-author: Varun Sharma (London Business School)
Abstract: Using bond holdings data, we show significant dispersion in reported prices and implied credit spreads for the same bond at the same point in time across insurers. We show that this phenomenon is largely concentrated within privately placed corporate debt and that the cross-sectional dispersion in reported prices peaks during the financial crisis. We document that privately placed bonds are primarily priced using internal models and are rated using inputs provided by insurance companies themselves. However, the dispersion in prices is not just a result of model error. Reported prices of privately placed debt are systematically higher than the prices of comparable non-privately placed bonds during the financial crisis. Moreover, the reported prices are higher when a bond is likely to be permanently impaired. Thus, we provide evidence that the opacity in prices and influence over ratings, which give insurers more reporting flexibility, are potential determinants of demand for privately placed debt as they help to smooth fluctuations in regulatory capital requirements, particularly in bad times.