The Bond Pricing Implications of Rating-Based Capital Requirements
Year: 2017
Type: article
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.
Authors: Scott Murray, Stanislava Nikolova
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3131096774