We perform portfolio-level analyses to understand insurance firms’ preferred habitat behavior in the government bond market. Based on portfolio durations and portfolio weights across maturities, we find that interest rate risk exposures of insurers’ portfolios are related to their operating liabilities and financing constraints. We show that this habitat behavior significantly affects bond pricing. During the “quantitative easing” era, bond purchases by the Federal Reserve have a larger impact on the yields of Treasury bonds with a higher habitat demand.

This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on VOV, are priced. The pricing impact of VOV strengthens during market crashes, suggesting that VOV is particularly relevant during market turmoil, when investors demand increased compensation for VOV risk.

This study examines the relationship between corporate asset growth rates and bond performance, uncovering a strong inverse relationship between the two. Higher asset growth increases asset value, potentially offering greater protection to bondholders and leading to lower bond returns. By decomposing bond returns into initial yields and subsequent yield changes, our analysis supports this expectation and suggests that investors may overreact to asset growth, as investor sentiment significantly influences bond yields in response to it. Finally, drawing on insights from leverage-based Q-theory, we examine how stock returns respond to asset growth, accounting for its effect on bond performance.