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C.T.,2011, Regulatory pressure and fire sales in the corporate bond market
| Venue: | Journal of Financial Economics |
| Citations: | 38 - 4 self |
BibTeX
@ARTICLE{Ellul_c.t.,2011,regulatory,
author = {Andrew Ellul and Chotibhak Jotikasthira and Christian T. Lundblad and Jennifer Conrad},
title = {C.T.,2011, Regulatory pressure and fire sales in the corporate bond market},
journal = {Journal of Financial Economics},
year = {},
pages = {596--620}
}
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Abstract
This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. Regulations either prohibit or impose large capital requirements on the holdings of speculative-grade bonds. As insurance companies hold over one third of all outstanding investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties and associated bargaining power. Using insurance company transaction data from 2001-2005, we find insurance companies that are relatively more constrained by regulation are, on average, more likely to sell downgraded bonds. This forced selling generates elevated selling pressure around the downgrade which causes price pressures and subsequent price reversals, indicative of significant periods during which transaction prices deviate from fundamental values. Conditionally, the selling pressure, as well as the resulted price reversals, appears larger during periods in which insurance companies as a group are more constrained and other potential buyers ’ capital is scarce. In the cross section, bonds widely held by constrained insurance companies experience significantly larger selling pressure and larger price reversals. Investors providing liquidity to this market appear to earn
Keyphrases
insurance company fire sale regulatory pressure corporate bond market selling pressure resulted price reversal downgraded bond price pressure collective need significant period potential buyer capital price reversal constrained insurance company transaction price outstanding investment-grade corporate bond regulatory constraint insurance company transaction data downgraded corporate bond fundamental value speculative-grade bond subsequent price reversal cross section downgraded issue large capital requirement
