FRIC/FI Seminar with Valentin Haddad, UCLA Anderson School of Management

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Valentin Haddad, UCLA Anderson School of Management.

Valentin Haddad will present:

Asset Insulators

Authors:
Gabriel Chodorow-Reich, Harvard University & NBER
Andra C. Ghent, University of Wisconsin – Madison
Valentin Haddad, UCLA & NBER

ABSTRACT:
We propose that financial institutions can act as asset insulators, holding as-sets for the long run to protect their valuations from consequences of exposure to financial markets. We illustrate the empirical relevance of this theory for the balance sheet behavior of a large class of intermediaries, life insurance companies. The pass-through from assets to equity is an especially informative metric for distinguishing the asset insulator theory from Modigliani-Miller or other standard models. We estimate the pass-through using security-level data on insurers’ holdings matched to corporate bond returns. Uniquely consistent with the insulator view, outside of the 2008-2009 crisis insurers lose as little as 10 cents in response to a dollar drop in asset values, while during the crisis the pass-through rises to roughly 1. The rise in pass-through highlights the fragility of insulation exactly when it is most valuable.