Rainy Day Liquidity
58 Pages Posted: 3 Jun 2019 Last revised: 16 Jun 2020
Date Written: May 12, 2019
Insurance firms are a key player in the corporate bond market. In this study, we consider the role of life insurers as "rainy day" liquidity providers who improve liquidity in stressful conditions due to the nature of long-term buy-and-hold investments. To this end, we present evidence that insurers' corporate bond purchases improve bond liquidity during the financial crisis and among downgraded bonds facing selling pressure. Life insurers are net purchasers of downgraded bonds within investment grades. Downgraded bonds with greater purchases from life insurers are significantly better priced.
Keywords: Liquidity provision, Market liquidity, Corporate bonds, Funding liquidity, Search
JEL Classification: G11, G22
Suggested Citation: Suggested Citation