Abstract: Post-2008, corporate bond credit spreads decline when long-term interest rates increase. The pattern holds both unconditionally and around monetary policy announcements. In the cross-section, this negative co-movement is more pronounced for bonds held by life insurers. To rationalize these findings, I propose a model where life insurers with long-duration liabilities face duration mismatch and realize equity gains when long rates increase. The equity gains boost insurers' risk-bearing capacity and drive down equilibrium credit spreads. The model quantitatively explains the empirical finding and shows that insurers' duration mismatch can dampen or reverse unconventional monetary policy transmission to bond yields and issuance.
Discussant: Kerry Siani, Massachusetts Institute of Technology
Abstract: Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that this procyclical selling adversely affects the prices of these bonds.
Abstract: Regulators often promote financial inclusion by restricting prices. In response, firms may reduce the supply of their product, implying that some households lose from reduced access. This paper explores this tradeoff in the context of national price setting regulation in the US life insurance industry. I collect a new data set with over one million insurer-agent links across a subset of US commuting zones and document that poor commuting zones have fewer agents per household, fewer active insurers, and smaller and lower-rated insurers relative to rich commuting zones. Motivated by the data, I build a spatial model with multi-region insurers and households with heterogeneous preferences for differentiated life insurance products. The model captures the empirical spatial sorting patterns and admits clear predictions for how insurer location choices change in response to national pricing. I take the model to the data and estimate price elasticities for low- and high-income households. Under flexible pricing, welfare differences between the poorest commuting zones and the richest commuting zone are between 0.4-0.95% of yearly income, most of which comes from differential access to insurers. National pricing amplifies spatial access disparities due to the geographic reallocation of insurers toward richer markets. Place-based tax policies that target the access margin reduce welfare differences between poor and rich commuting zones by 10.3-20.6%.
Bryan Richard Gutierrez Cortez, University of Minnesota
Victoria Ivashina, Harvard University
Juliana Salomao, University of Minnesota
Abstract: Are defined contribution (DC) pension funds capital flows sensitive to performance?
In many countries, employees have the discretion to choose and switch their pension managers. However, given the widespread evidence on inertia in individual household financial choice, the answer is not clear. Using novel data on retirement accounts for
nearly 10 million individuals, we look at the employee pension-manager switching behavior conditional on plan risk-profile. We see that switching across managers even within the same pension product is not uncommon, and switching propensity increase over time. We also show that these capital flows across managers are sensitive to and
convex in fund performance. This account flow to performance sensitivity is an important pressure that is tied to managers incentives and portfolio allocation. Relatedly, we find that an increase in competitive pressure among pension providers is conducive to
shift to higher-yielding bond holdings conditional on risk of the plan.
Discussant: Clemens Sialm, University of Texas-Austin
