Strategic liquidity management and opportunistic trading: an empirical investigation

Abstract

This research examines strategic liquidity management and opportunistic trading by studying portfolio decisions of United States insurers. I find that insurers located in hurricane-prone areas sell bonds to hold cash before disasters. Interestingly, inland insurers also sell bonds to hold cash before disasters, leading to prices falling excessively after disasters when affected insurers are forced to sell. Using approximately 40% of pre-disaster cash holdings, inland insurers exploit discounted prices after disasters and realize $5.72 million in abnormal profits. This finding is consistent with models in which opportunistic traders take advantage of the price pressure from liquidity-constrained, disaster-affected traders. These results highlight the strategic motive for managing liquidity and the effect of opportunistic trading on the corporate bond market.