Investment commonality across insurance companies: Fire sale risk and corporate yield spreads

Keywords: yield spread, fire sales, regulation, credit rating, corporate bonds, insurance companies, capital constraints.
  • 11 Agosto 2017

Por Vikram Nanda, Wei Wu y Xing Zhou.

Finance and Economics Discussion Series 2017-069.


Insurance companies often follow highly correlated investment strategies. As major investors in corporate bonds, their investment commonalities subject investors to firesale risk when regulatory restrictions prompt widespread divestment of a bond following a rating downgrade. Reflective of fire-sale risk, clustering of insurance companies in a bond has significant explanatory power for yield spreads, controlling for liquidity, credit risk and other factors. The effect of fire-sale risk on bond yield spreads is more evident for bonds held to a greater extent by capital-constrained insurance companies, those with ratings closer to NAIC risk-categories with larger capital requirements, and during the financial crisis.