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The Effect of The U.S. Property Liability Insurer's Product-diversification on the derivatives usage

  • Journal of Insurance and Finance
  • 2020, 31(3), pp.77-101
  • DOI : 10.23842/jif.2020.31.3.003
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management
  • Received : January 6, 2020
  • Accepted : August 21, 2020
  • Published : August 31, 2020

Injung Song 1 Chungwan Hong 1

1한국외국어대학교

Accredited

ABSTRACT

This paper examines the effect of the U.S. property and liability insurance companies’ product diversification on financial derivatives usage. Prior studies discussed the diversification of the firm but have not incorporated its relation with the derivatives particularly for options. We focus on the firms' product diversification with the use of options and reinsurance for hedging purposes. This paper finds the following evidence. First, there is no significant evidence of diversification effect using all types of derivatives. Second, firms' product diversification is positively associated with the options. This implies that diversified firms are exposed to greater asset risk which results in increased demand for options to hedge. Last, there exists a negative relation between reinsurance and options supporting that they are considered as substitutes.

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