Understanding the Ownership Structure of Corporate Bonds
- (pp. 73-92)
Abstract
Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing model with leverage-constrained households and institutional investors. Insurers have relatively cheap access to leverage through their underwriting activity. They hold a leveraged portfolio of low-beta assets in equilibrium, relaxing other investors' leverage constraints. The model explains recent empirical findings on insurers' portfolio choice and its impact on asset prices.Citation
Koijen, Ralph S. J., and Motohiro Yogo. 2023. "Understanding the Ownership Structure of Corporate Bonds." American Economic Review: Insights, 5 (1): 73-92. DOI: 10.1257/aeri.20210550Additional Materials
JEL Classification
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G22 Insurance; Insurance Companies; Actuarial Studies
- G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors