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; funding agreement-backed securities; life insurance companies; self-fulfilling runs (search for similar items in EconPapers)
JEL-codes: G01 G14 G22 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-03-25
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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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)

Related works:
Journal Article: Self-Fulfilling Runs: Evidence from the US Life Insurance Industry (2020)
Working Paper: Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry (2016)
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