1. The Bond-Pricing Implications of Rating-Based Capital Requirements.
- Author
-
Murray, Scott and Nikolova, Stanislava
- Subjects
BOND prices ,CAPITAL requirements ,BOND ratings ,INSURANCE company investments ,CORPORATE bonds ,ECONOMIC demand ,PRICING ,BOND market - Abstract
This article demonstrates that rating-based capital requirements, through their impact on insurers' investment demand, affect corporate bond prices. Consistent with insurers' low demand for investment-grade bonds with a rating close to noninvestment-grade, these bonds outperform. Consistent with insurers' high (low) demand for investment-grade bonds with high (low) systematic risk exposure, these bonds underperform (outperform). Insurer demand, measured by insurer holdings, explains most of these pricing effects. We identify rating-based capital requirements as the driver of insurer demand, and thus the pricing effects, by showing that the effects do not exist before these requirements' implementation in 1993. [ABSTRACT FROM AUTHOR]
- Published
- 2022
- Full Text
- View/download PDF