Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy

50 Pages Posted: 26 Aug 2020 Last revised: 29 Jun 2023

See all articles by Yubo Liu

Yubo Liu

Xiamen University

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Hayong Yun

Michigan State University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2023

Abstract

We study the role of insurance companies in propagating liquidity shocks to the real economy. We
use natural disasters as our instrument to identify exogenous shifts in capital‐market liquidity, and
study whether capital‐market liquidity affects regional‐level fiscal conditions and output. Aggregate
disaster‐driven sales of disaster‐unaffected municipal bonds by exposed insurers cause low GDP
growth and high unemployment. In micro data, natural disasters trigger large, unexpected redemptions of property‐insurance contracts, causing: fire sales of municipal bonds; increased
borrowing costs in primary markets; decreased muni issuance; lower investment in muni‐reliant
sectors. Therefore, insurance companies do propagate liquidity shocks to the real economy.

Keywords: insurance companies, market liquidity, natural disasters, fire sales, reinsurance, public and private investment

JEL Classification: G22, G14, G32, G31, E22

Suggested Citation

Liu, Yubo and Rossi, Stefano and Yun, Hayong, Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy (June 28, 2023). Available at SSRN: https://ssrn.com/abstract=3656518 or http://dx.doi.org/10.2139/ssrn.3656518

Yubo Liu

Xiamen University ( email )

Xiamen, Fujian 361005
China

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hayong Yun (Contact Author)

Michigan State University - Department of Finance ( email )

667 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/view/hayongyun/

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