Welcome! I am an Assistant Professor at the Department of Finance at Bocconi University and an affiliate of BAFFI and IGIER. My research interests include empirical asset pricing, insurance markets, and behavioral finance.
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Office 2-d2-04Bocconi UniversityVia Roentgen, 1 Milano20136 ItalyE-mail: jakob.sorensen@unibocconi.itWorking Papers
Working Papers
Abstract:We establish an insurer balance-sheet channel that amplifies the transmission of monetary policy to housing markets. Changes in interest rates revalue insurers' assets, affecting the tightness of regulatory capital constraints and, thereby, the shadow cost of capital. Using monetary policy surprises as an instrument and the universe of U.S. homeowners insurance price changes, we estimate that a one-percentage-point increase in long-term Treasury yields raises insurance prices by 3.8%, even though higher yields lower the present value of expected claims. Consistent with a balance-sheet channel, price responses are strongest among financially constrained insurers holding interest-rate-sensitive investment portfolios. Because homeowners insurance accounts for a substantial share of housing costs, these price responses matter for households: the insurance channel's effect on housing costs is roughly half as large as the traditional mortgage channel. As a consequence, house prices decline significantly more after contractionary monetary policy surprises in regions served by more exposed insurers, with larger effects in areas with higher insurance costs. Our findings identify homeowners insurance as an important channel of monetary policy transmission, complementing the traditional focus on credit markets.
Abstract:I study how the pricing of credit risk varies over time in corporate bond and equity markets. I introduce a new measure of credit market sentiment, yield-for-risk, which captures the cross-sectional sensitivity of corporate bond spreads to default risk. When yield-for-risk is high, riskier bonds and stocks earn higher subsequent returns, consistent with a positive risk--return relationship. When yield-for-risk is low, credit spreads are insensitive to risk, and the risk--return relationship inverts: securities issued by riskier firms earn lower future returns than those issued by safer firms in both the corporate bond and equity markets. The simultaneous inversion across asset classes suggests investors overestimate the fundamental value of corporations leading them to neglect the credit risk associated with their capital structure. Periods of low yield-for-risk are preceded by low default rates, loosening lending standards, and high past returns, and coincide with increased debt issuance concentrated among the riskiest issuers. I present an equilibrium model with extrapolative beliefs that accounts for the empirical patterns across debt and equity markets.
This paper was previously circulated under the title ”Risk Neglect in the Corporate Bond Market”
This paper was previously circulated under the title ”Risk Neglect in the Corporate Bond Market”
Abstract:We study trading at settlement (TAS) in which orders are priced at a differential to the not-yet-known daily settlement price. In our model, TAS mitigates adverse selection for patient liquidity traders by “cream-skimming” uninformed order flow. Consistent with the model's key predictions, we find that (i) TAS volume correlates positively with uninformed demand; (ii) the distribution of TAS prices is tightly centered around zero; (iii) the TAS market is deeper than the regular market; (iv) liquidity in the regular market is low when the TAS market share is high; and (v) TAS orders placed early in the day have no impact on the daily settlement price, whereas TAS orders placed during the settlement window have a significant impact. Our results point to adverse selection as the main driver of trading costs.
Publications
Publications
Abstract:We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model's key predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. To help control for alternative explanations, we show our results hold both for life insurance companies and, using a novel approach, for property and casualty insurance companies. Our findings show that insurers' asset allocation and product pricing decisions are more connected than previously thought.
Journal of Finance, 77(2), 863-921
Featured in voxeu.org, forbes.com, Børsen.dk (Danish), What Happens Next?, Rig På Viden (Danish).
Abstract:Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.
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