Final Demand for Structured Finance Securities

Craig B. Merrill (), Taylor D. Nadauld () and Philip E. Strahan ()
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Craig B. Merrill: Wharton Financial Institutions Center, University Of Pennsylvania, Philadelphia, Pennsylvania 19104; Mariott School, Brigham Young University, Provo, Utah 84602
Taylor D. Nadauld: Mariott School, Brigham Young University, Provo, Utah 84602
Philip E. Strahan: Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467; National Bureau of Economic Research, Cambridge, Massachusetts 02138

Management Science, 2019, vol. 65, issue 1, 390-412

Abstract: Structured finance boomed during the run-up to the 2008 financial crisis. Highly rated, structured securities offered higher yield than other similarly rated bonds because of their concentration of systematic risk, but regulatory capital requirements did not account for this risk. As a result, regulated entities facing capital constraints had an incentive to invest in them. We show that life insurance companies exposed to unrealized losses from low interest rates in the early 2000s increased their holdings of highly rated securitized assets, consistent with regulatory arbitrage distorting the demand to hold these assets.

Keywords: finance; financial institutions; securitization; structured finance (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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