Reaching for yield in the bond market
By: Bo Becker, Victoria Ivashina
Contributors: Ivashina, Victoria; Harvard Business School
Edition: Revised edition
Series: Working paper / Harvard Business School -- 12-103; Working paper (Harvard Business School) -- 12-103
Publisher: Harvard Business School
Published: 2013
Place of publication: Boston]
Language: eng
Number of pages: 49
Description: Reaching-for-yield--the propensity to buy riskier assets in order to achieve higher yields--is believed to be an important factor contributing to the credit cycle. This paper analyses this phenomenon in the corporate bond market. Specifically, we show evidence for reaching for yield among insurance companies, the largest institutional holders of corporate bonds. Insurance companies have capital requirements tied to the credit ratings of their investments. Conditional on ratings, insurance portfolios are systematically biased toward higher yield, higher CDS bonds. This behavior appears to be related to the business cycle, being most pronounced during economic expansions. It is also more pronounced for the insurance firms for which regulatory capital requirements are more binding. The results hold both at issuance and for trading in the secondary market and are robust to a series of bond and issuer controls, including issuer fixed effects as well as liquidity and duration. Comparison of the ex-post performance of bonds acquired by insurance companies does not show outperformance, but higher volatility of realized returns.
Notes: "May 2012. (Revised December 2012. NBER Working Paper Series, No. 18909, March 2013)" -- Publisher's website.

Includes bibliographical references (pages 30-32).