The behavior of intoxicated investors
Subtitle: the role of institutional investors in propagating the crisis of 2007-2008
By: Alberto Manconi, Massimo Massa, Ayako Yasuda
Contributors: Massimo, Massa; Yasuda, Ayako; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16191; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16191.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/19/2010.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.