Luciano, Elisa and Rochet, Jean-Charles
(2022)
The Fluctuations of Insurers’ Risk Appetite.
Journal of Economic Dynamics and Control, vol.144.
Abstract
The risk appetite of insurance companies fluctuates over time in a quasi cyclical fashion. When their capitalization is high (low), companies choose portfolios with a high (small) share of risky assets. We show that this phenomenon has the same source as the underwriting cycle, namely recapitalization costs. We build a dynamic stochastic general equilibrium model of the insurance sector where financial frictions prevent companies from maintaining a target leverage. Portfolio decisions of insurers fluctuate with their aggregate capitalization. The model rationalizes two apparently disjoint pieces of evidence: long-standing empirical evidence on underwriting cycles and more recent evidence on the fluctuations of insurance companies’ risk appetite.
Item Type: | Article |
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Language: | English |
Date: | November 2022 |
Refereed: | Yes |
Place of Publication: | Amsterdam |
JEL Classification: | G11 - Portfolio Choice; Investment Decisions G12 - Asset Pricing; Trading volume; Bond Interest Rates G23 - Pension Funds; Other Private Financial Institutions |
Subjects: | B- ECONOMIE ET FINANCE |
Divisions: | TSE-R (Toulouse) |
Site: | UT1 |
Date Deposited: | 28 Mar 2023 10:48 |
Last Modified: | 30 Mar 2023 12:32 |
OAI Identifier: | oai:tse-fr.eu:128012 |
URI: | https://publications.ut-capitole.fr/id/eprint/47321 |