Financial Crisis, Systemic Risk, and Performance of Financial Risk Insurers

43 Pages Posted: 24 Aug 2010 Last revised: 11 Mar 2013

See all articles by Frank Chen

Frank Chen

University of Rhode Island - College of Business Administration

Xuanjuan Chen

Shanghai University of Finance and Economics

Zhenzhen Sun

University of Massachusetts Dartmouth; University of Massachusetts Dartmouth

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Date Written: August 23, 2010

Abstract

Most traditional insurance companies have escaped the financial storms during 2007-2009 while companies engaging in financial risk taking were not this lucky. In this study, we examine the performance of financial risk insurers and analyze the contributing role of financial risk insurers to systemic risk during the crisis. First, we find a subset of financial risk insurance companies, financial guaranty insurers, are badly affected by the financial crisis both in terms of their stock and operating performance. Second, in line with financial contagion, we find insurer performance is highly correlated with various measures of systemic risks. Finally, the deterioration of financial risk insurers’ performance has a negative externality on corporate bonds they insure. The yield spreads of bonds insured by financial guaranty insurers increase after the insurers experience rating downgrades, resulting in significant wealth loss for bondholders.

Keywords: financial crisis, systemic risk, financial contagion

JEL Classification: G14

Suggested Citation

Chen, Frank and Chen, Xuanjuan and Sun, Zhenzhen and Yu, Tong, Financial Crisis, Systemic Risk, and Performance of Financial Risk Insurers (August 23, 2010). Available at SSRN: https://ssrn.com/abstract=1664158 or http://dx.doi.org/10.2139/ssrn.1664158

Frank Chen

University of Rhode Island - College of Business Administration ( email )

Kingston, RI 02881
United States

Xuanjuan Chen

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Zhenzhen Sun

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
Dartmouth, MA 02747-2300
United States

University of Massachusetts Dartmouth ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

Tong Yu (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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