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      The Impact of Pensions and Insurance on Global Yield Curves
      26 Jun 2018Working Paper Summaries

      The Impact of Pensions and Insurance on Global Yield Curves

      by Robin Greenwood and Annette Vissing-Jorgensen
      The global financial crisis and its aftermath had a dramatic impact on the solvency of pension funds and insurance companies. Drawing on a large cross-section of countries, this paper shows the importance of pension and insurance companies in determining the yields on long maturity bonds around the world.
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      Author Abstract

      We document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. We draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. We describe settings in which pension discount rules can have a destabilizing impact on bond markets.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: June 2018
      • HBS Working Paper Number: HBS Working Paper #18-109
      • Faculty Unit(s): Finance
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      Robin Greenwood
      Robin Greenwood
      George Gund Professor of Finance and Banking
      Co-Unit Head, Finance
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