NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Asset Insulators

Gabriel Chodorow-Reich, Andra Ghent, Valentin Haddad

NBER Working Paper No. 24973
Issued in August 2018
NBER Program(s):The Asset Pricing Program, The Corporate Finance Program, The Economic Fluctuations and Growth Program, The Monetary Economics Program

We propose that financial institutions can act as asset insulators, holding assets for the long run to protect their valuations from consequences of exposure to financial markets. We demonstrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 15 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.

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Document Object Identifier (DOI): 10.3386/w24973

 
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