We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies ...characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets’ own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using US stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
The Fragility of Market Risk Insurance KOIJEN, RALPH S.J.; YOGO, MOTOHIRO
The Journal of finance (New York),
April 2022, Volume:
77, Issue:
2
Journal Article
Peer reviewed
Open access
ABSTRACT
Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased ...and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low‐interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID‐19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.
I estimate a dynamic investment model for mutual managers to study the crosssectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the ...fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time-varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay-for-performance sensitivities that relates to observable fund characteristics.
Using security-level holdings for all euro-area investors, we study portfolio rebalancing during the quantitative easing program from March 2015 to December 2017. Foreign investors outside the euro ...area accommodated most of the Eurosystem’s purchases. Duration, government credit, and corporate credit risk did not get concentrated in particular regions or investor sectors. We estimate a demand system for government bonds by instrumental variables to relate portfolio rebalancing to yield changes. Government bond yields decreased by 65 basis points on average, and this estimate varies from 38 to 83 basis points across countries.
Carry Koijen, Ralph S.J.; Moskowitz, Tobias J.; Pedersen, Lasse Heje ...
Journal of financial economics,
February 2018, 2018-02-00, 20180201, Volume:
127, Issue:
2
Journal Article
Peer reviewed
Open access
We apply the concept of carry, which has been studied almost exclusively in currency markets, to any asset. A security’s expected return is decomposed into its “carry,” an ex-ante and model-free ...characteristic, and its expected price appreciation. Carry predicts returns cross-sectionally and in time series for a host of different asset classes, including global equities, global bonds, commodities, US Treasuries, credit, and options. Carry is not explained by known predictors of returns from these asset classes, and it captures many of these predictors, providing a unifying framework for return predictability. We reject a generalized version of Uncovered Interest Parity and the Expectations Hypothesis in favor of models with varying risk premia, in which carry strategies are commonly exposed to global recession, liquidity, and volatility risks, though none fully explains carry’s premium.
Abstract
We use data from aggregate stock and dividend futures markets to quantify how investors’ expectations about economic growth evolved across horizons following the outbreak of the novel ...coronavirus (COVID-19) and subsequent policy responses until July 2020. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a forecasting model. We show how the actual forecast and the bound evolve over time. As of July 20th, our forecast of annual growth in dividends points to a decline of 8% in both the United States and Japan and a 14% decline in the European Union compared to January 1. Our forecast of GDP growth points to a decline of 2% in the United States and Japan and 3% in the European Union. The lower bound on the change in expected dividends is -17% in the United States and Japan and -28% in the European Union at the 2-year horizon. News about U.S. monetary policy and the fiscal stimulus bill around March 24 boosted the stock market and long-term growth but did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 in all geographies.
SHADOW INSURANCE Koijen, Ralph S. J.; Yogo, Motohiro
Econometrica,
20/May , Volume:
84, Issue:
3
Journal Article
Peer reviewed
Open access
Life insurers use reinsurance to move liabilities from regulated and rated companies that sell policies to shadow reinsurers, which are less regulated and unrated offbalance-sheet entities within the ...same insurance group. U.S. life insurance and annuity liabilities ceded to shadow reinsurers grew from $11 billion in 2002 to $364 billion in 2012. Life insurers using shadow insurance, which capture half of the market share, ceded 25 cents of every dollar insured to shadow reinsurers in 2012, up from 2 cents in 2002. By relaxing capital requirements, shadow insurance could reduce the marginal cost of issuing policies and thereby improve retail market efficiency. However, shadow insurance could also reduce risk-based capital and increase expected loss for the industry. We model and quantify these effects based on publicly available data and plausible assumptions.
AbstractThe COVID-19 pandemic severely disrupted financial markets and the real economy worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing the ...unusual nature of the shock, the academic community has produced an impressive amount of research during the last year. Macro-finance models have been extended to analyze the impact of epidemics. Empirical papers study the origins and consequences of the disruptions and the impact of policy interventions. New research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This special issue contains early contributions to this important and rapidly developing literature.1
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal ...health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as—19 percent for annuities and — 57 percent for life ...insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
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