2013, Vol.24, No.1

Journal of Insurance and Finance 2023 KCI Impact Factor : 0.59

pISSN : 2384-3209
https://journal.kci.go.kr/kiri

This paper empirically examines the effects of risk-based capital requirement on capital, asset risk, sales and profitability of life insurance companies in Korea. According to the results of 2SLS regression analysis based on simultaneous equations system, the adjustment speeds to the target levels of asset risk, sales, and profitability have increased for the companies under regulatory pressure of risk-based capital requirement. According to the difference-in-difference analysis, the introduction of risk-based capital requirement has decreased asset risks of life insurance companies. However, we do not find any concrete evidence that risk-based capital requirement restricted sales and profitability of life insurance companies.

We study the role of finance for boosting domestic demand, focusing on its function of rebuilding the relationship between large firms and SMEs (Small and Medium Enterprises). In particular, we suggest financing policies that enhance trickle-down effects from large exporters to domestic players by facilitating risk-sharing between them through financial sector. In the Korean economy, there has been a huge gap in market power between large export-oriented firms and domestic-oriented SMEs. Thus SMEs have been bearing too much burden of risks compared with their counterparts when they deal with large firms. For example, when SMEs consider to invest in plant and equipment for the production of a certain large-firm-specific intermediate good, large firms often show a tendency of not disclosing whether to purchase the product in advance. If so, the SMEs have to take all the risks of investment outcome. This kind of hold-up problems contribute to weak domestic demand due to the aggravated profit of SMEs as well as the shrinking trend of investment in plant and equipment. Thus, it is worthwhile to consider giving direct incentives to large firms for sharing such investment risks with SMEs when SMEs invest in plant and equipment for large-firm-specific goods. Such measures will also be helpful for enhancing the profit of financial sector because it will lower the SMEs’ default risk.

This paper develops a two-factor model of the term structure of the swap spread. In our model, the swap spread depends on 1) the instantaneous swap rate as the first factot and 2) the stochastic volatility of the swap spread as the second factor. We propose the closed form solution of swap spread from the chosen two factors. We estimate the stochastic volatility from the GARCH(1,1) model. We also test our model by using GMM based on the cross sectional data. The empirical result shows that the volatility is not significant for explaining the term structure of swap spread, but the first factor model has the explanatory power for the term structure of swap spread in Korean market.