Journal of Financial and Quantitative Analysis Vol. 57 No. 6 2022
The Bond-Pricing Implications of Rating-Based Capital Requirements
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.
- DOI
- 10.1017/s0022109021000132
- Volume
- 57
- Issue
- 6
- Pages
- 2177-2207
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex