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Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry

Nathan Foley-Fisher (), Borghan Nezami Narajabad and Stephane Verani ()

No 2015-32, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Is liquidity creation in shadow banking vulnerable to self-fulfilling runs? Investors typically decide to withdraw simultaneously, making it challenging to identify self-fulfilling runs. In this paper, we exploit the contractual structure of funding agreement-backed securities offered by U.S. life insurers to institutional investors. The contracts allow us to obtain variation in investors' expectations about other investors' actions that is plausibly orthogonal to changes in fundamentals. We find that a run on U.S. life insurers during the summer of 2007 was partly due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

Keywords: Shadow banking; life insurance companies; funding agreement-backed securities; self-fulfilling runs (search for similar items in EconPapers)
JEL-codes: G14 G01 G22 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-03-25, Revised 2015-03-25
New Economics Papers: this item is included in nep-ias
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Citations: View citations in EconPapers (11) Track citations by RSS feed

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015032pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.032 http://dx.doi.org/10.17016/FEDS.2015.032 (application/pdf)

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Working Paper: Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (2016) Downloads
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