The Impact of Quantitative Easing on Stock and CDS Prices of European Insurance Companies

The project is funded by Deutscher Verein für Versicherungswissenschaft (DVfVW)

A first part of this project aims at completing an ongoing research project on the asset pricing implications of demographic change. The focus will also shift slightly to emphasizing asset price movements as an outcome of low growth because of secular stagnation. The current abstract of the project reads as follows: Demographic change leads to the relative scarcity of raw labor and relative abundance of physical capital. Standard analyses suggest that this depresses asset returns and has adverse welfare consequences for households who retire when asset returns are low. In this paper, we investigate quantitatively the aforementioned effects in the U.S. economy. To this end, we develop a large scale overlapping generations model with two assets and risky human capital. We ask by how much human capital adjustments, which increase the quality of labor, reduce the downward pressure on asset returns and mitigate the adverse welfare consequences. Preliminary results show that the expected rate of return to risky equity decreases by roughly 0.16 percentage points until 2030 while the equity premium increases by about 0.08 percentage points. Endogenous human capital adjustments are crucial for these small effects.

In a second part, we plan to extend the framework by an explicit notion of government debt positions. This extension will enable us to price government debt in a coherent framework (a production economy with multiple assets) and to predict how risky government debt is going to evolve in the future. Applications will consider extensions also to the European Union. Within this framework it will then also be possible to make statements about the stabilizing role of Euro bonds.