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Working Paper
Insurers’ Investments and Insurance Prices
We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model’s predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. Our results hold for both life insurance and property and casualty insurance companies. The findings show that ...
Report
A Demand System Approach to Asset Pricing
This Staff Report was previously titled "An Equilibrium Model of Institutional Demand and Asset Prices." {{p}} We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings data. The equilibrium price vector is uniquely determined by market clearing, which equates the supply of each asset to aggregate demand. We estimate the model on U.S. stock market data by instrumental variables, under an identifying assumption that allows for price impact. The model sheds light on the role of institutions in stock market ...
Working Paper
Searching for Yield Abroad : Risk-Taking Through Foreign Investment in U.S. Bonds
The risk-taking effects of low interest rates, now prevailing in many advanced countries, "search-for-yield," can be hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their portfolios toward riskier U.S. corporate bonds, consistent with "search-for-yield". We ...
Working Paper
Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap
Black Americans face higher cyclical unemployment risk than white Americans: job-finding rates during recessions are lower and the risk of becoming long-term unemployed is higher. Differences in unemployment risk across Black and white Americans imply that Black Americans optimally invest less in risky assets. We show that differences in unemployment risk can explain up to 90% of the gap in the stock market shares of Black and white portfolios, resulting in lower returns on wealth for Black Americans. Through this portfolio channel, adverse labor market conditions for Black Americans ...
Working Paper
Life-Cycle Portfolio Choices and Heterogeneous Stock Market Expectations
Survey measurements of households’ expectations about U.S. equity returns show substantial heterogeneity and large departures from the historical distribution of actual returns. The average household perceives a lower probability of positive returns and a greater probability of extreme returns than history has exhibited. I build a life-cycle model of saving and portfolio choices that incorporates beliefs estimated to match these survey measurements of expectations. This modification enables the model to greatly reduce a tension in the literature in which models that have aimed to match ...
Working Paper
Do Sustainable Investment Strategies Hedge Climate Change Risks? Evidence from Germany's Carbon Tax
It is difficult to assess the effectiveness of investment strategies that screen companies based on environmental criteria to hedge climate change risk because physical risks have not yet fully materialized and policies to combat climate change are usually widely anticipated. This paper sidesteps these limitations by analyzing the stock market response to plausibly exogenous changes in expectations about the level of a carbon tax in Germany. The risk-adjusted return on two sustainable investment approaches---screening companies based on environmental scores and on firms' carbon ...