Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193582
Authors: 
Ellul, Andrew
Jotikasthira, Chotibhak
Kartasheva, Anastasia
Lundblad, Christian T.
Wagner, Wolf
Year of Publication: 
2018
Series/Report no.: 
ESRB Working Paper Series 75
Abstract: 
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.
Subjects: 
Systemic risk
Financial stability
Inter-connectedness
Insurance companies
JEL: 
G11
G12
G14
G18
G22
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-042-9
Document Type: 
Working Paper
Social Media Mentions:

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