Yifan Yu
JOB MARKET PAPER
Life insurers' demand for duration (along with other bond characteristics including yield spread, credit rating, and liquidity) are estimated using Koijen and Yogo (2019) characteristics-based demand model adjusted to the context of bond. This model is micro-founded by investors with mean-variance preferences for returns, who consider that returns follow a factor structure and that both expected returns and factor loadings depend on assets' own characteristics.
Hunt-for-Duration in Corporate Bond Market
Abstract: This paper examines the duration hedging behavior in the corporate bond market by studying the investment decisions of life insurance companies, the largest institutional investor in this market. Using security-level data on insurers’ bond holdings, I find that life insurers are tilting their corporate bond portfolios towards bonds with higher duration as the interest rates decrease to historical lows since the 2008 financial crisis. This hunt-for-duration behavior is due to life insurers’ interest rate risk hedging to ensure better duration matching between their assets and liabilities. I further show that hunt-for-duration by life insurers can drive overpricing of corporate bonds when a negative monetary policy surprise hits.
RESEARCH IN PROGRESS
The Impact of the Risk-Based Capital Reform in the Insurance Industry on Corporate Financing
Draft available upon request
Abstract: I investigate how the risk-based capital (RBC) reform in the insurance industry initiated in year 1993 affect life insurers' investment behavior in corporate bonds, and how RBC-induced distortion in insurers' investment practices could have an impact on credit allocation, and ultimately real investment in the economy. Following the reform, I observe that insurers tilt their portfolios towards lowest rated corporate bonds within a bond risk category defined by the RBC rule. Through shifting insurers' bond demand, I find that the RBC reform changes the credit supply conditions to a particular group of firms: those that have credit ratings barely fitting into a low risk category, and belong to industries where insurers hold more corporate bonds prior to the reform. Furthermore, I find that these firms take advantage of the more favorable credit allocation conditions to increase investment and employment after the reform. These results highlight a channel through which the regulatory reform in the insurance industry can bear real consequences.
The Portfolio Balance Channel of Quantitative Easing: Inspecting the Insurance Companies
Abstract: Using data on U.S. insurance companies’ bond holdings, I study whether insurers rebalanced their bond portfolios during Quantitative Easing (QE) programs initiated by the Federal Reserve (Fed) since the 2008 financial crisis. Specifically, I examine whether insurers sold QE assets and replaced them with corporate bonds when the Fed conducted large-scale asset purchases. This paper investigates how unconventional monetary policy could affect credit supply condition in the real economy through the insurance sector.