Internal Models, Make Believe Prices, and Bond Market Cornering

Internal Models, Make Believe Prices, and Bond Market Cornering

Internal Models, Make Believe Prices, and Bond Market Cornering

Exploiting position-level heterogeneity in regulatory incentives to misreport and novel data on regulators, we document that U.S. life insurers inflate the values of corporate bonds using internal models. We estimate an additional $9-$18 billion decline in regulatory capital during the 2008 crisis, i.e., a 30% greater decline than what was reported.

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