Rising interest rates can expose life insurers to surrender risk by reducing the market value of their assets and raising policyholders'outside returns. This paper develops a minimal model of an insurance-specific run mechanism in which strategic interaction arises because early surrenders can deplete the asset pool backing continuation values. We analyze a strategic surrender game in which a run is an equilibrium outcome determined jointly by asset values, contractual surrender claims, and payoff-dependent continuation benefits. The model yields closed-form interest-rate thresholds for fundamentals-driven and self-fulfilling runs. Thinner capitalization weakly lowers the joint-surrender cutoff. Continuation benefits raise surrender thresholds but can also create strategic complementarity.
This paper explores how financial institutions pass interest rate risk through to product markets using the life insurance industry as a setting. We show theoretically that it is optimal for insurers to distort product issuance across maturities to offset duration gaps. We examine insurers exogenously exposed to intere...
Option-implied rates are often treated as frictionless because completed boxes deliver riskless payoffs. I show that this interpretation requires option- and benchmark-side implementation wedges to offset. Using SPX and RUT options from 2012-2025, I find a 2-3 bp unannualized increase in the option funding basis when m...
This paper proposes a new channel through which long-term interest rates transmit to credit spreads. When life insurers carry negative duration gaps, higher rates reduce their liabilities more than assets. Rate increases therefore boost equity and risk-bearing capacity, lowering equilibrium credit spreads. Empiricall...
Ziang Li· The Review of financial stud...· 1 citation
We introduce the nonlinear arbitrage correction (NAC), the residual that renders a linear benchmark model arbitrage-free while preserving the law of one price. The price of NAC captures the marginal Sharpe ratio increase consistent with no-arbitrage and upper-bounds the constrained Hansen–Jagannathan distance. Using...
Mirela Sandulescu, P. Schneider· The Review of financial stud...· 0 citations
Characteristic-based factors embed large unpriced common components that depress Sharpe ratios and lead to deviations from the mean-variance efficient (MVE) frontier. We discuss how to decompose tradable factor returns into priced (MVE) and unpriced components, showing that hedging unpriced variation realigns factors w...
Mikhail Chernov, Magnus Dahlquist, Lars A. Lochstoer· Annual Review of Financial E...· 0 citations
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