The Behavior of Intoxicated Investors: The role of institutional investors in propagating the crisis of 2007-2008

Alberto Manconi, Massimo Massa and Ayako Yasuda

No 16191, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a novel data of institutional investors' bond holdings, we examine a transmission of the crisis of 2007-2008 from the securitized bond market to the corporate bond market via joint ownership of these bonds by investors. We posit that, ceteris paribus, corporate bonds held by investors with high exposure to securitized bonds and liquidity needs experience greater selling pressure and price declines (yield increases) at the onset of the crisis. We further test predictions of a model of dynamic asset liquidation: Investors with large enough future liquidity shocks retain liquid assets, and instead sell assets that have relatively high temporary price impacts of trading. Mutual funds with higher sensitivity of pay to performance held higher portions of their portfolios in securitized bonds prior to the crisis. After the onset of the crisis, these funds did not sell securitized bonds on average and instead sold corporate bonds to meet their liquidity needs. Sales rose and yield spreads widened more for those corporate bonds whose mutual fund holders' portfolios were more heavily exposed to securitized bonds, compared to same-issuer bonds held by unexposed funds. Shorter-horizon mutual funds liquidated greater portions of their corporate bond holdings and in particular lower-rated bonds. In contrast, insurance companies sold little regardless of their exposure as long as they were above the minimum capital ratio threshold. These findings suggest that short-horizon mutual funds with high exposure to securitized bonds played a role in transmitting the crisis from securitized bonds to corporate bonds.

JEL-codes: G01 G11 G22 G23 G28 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-ifn and nep-mst
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as The Role of Institutional Investors in Propagating the Crisis of 2007–2008 , Alberto Manconi, Massimo Massa, Ayako Yasuda. in Market Institutions and Financial Market Risk , Carey, Kashyap, Rajan, and Stulz. 2012

Downloads: (external link)
http://www.nber.org/papers/w16191.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:16191

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w16191

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().