Ellul, Andrew
[VerfasserIn];
Jotikasthira, Chotibhak
[VerfasserIn];
Kartasheva, Anastasia V.
[VerfasserIn];
Lundblad, Christian T.
[VerfasserIn];
Wagner, Wolf
[VerfasserIn]
Erschienen in:ESRB: Working Paper Series ; No. 2018/75
Umfang:
1 Online-Ressource (59 p)
Sprache:
Englisch
DOI:
10.2139/ssrn.3723422
Identifikator:
Entstehung:
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May, 2018 erstellt
Beschreibung:
Financial intermediaries often provide guarantees that resemble out-of-the-money put options, exposing them to tail risk. Using the U.S. life insurance industry as a laboratory, we present a model in which variable annuity (VA) guarantees and associated hedging operate within the regulatory capital framework to create incentives for insurers to overweight illiquid bonds (“reach-for-yield”). We then calibrate the model to insurer-level data, and show that the VA-writing insurers’ collective allocation to illiquid bonds exacerbates system-wide fire sales in the event of negative asset shocks, plausibly erasing up to 20-70% of insurers’ equity capital