VGSF - WU Vienna - LC

Andrew Ellul, Indiana University

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Andrew El­lul from In­di­ana Uni­versity, Kel­ley School of Busi­ness to present his re­search pa­per.
Per­sonal Webpage

Pa­per

In­surers as As­set Man­agers and Sys­temic Risk

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.



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