Working Paper: NBER ID: w16191
Authors: Alberto Manconi; Massimo Massa; Ayako Yasuda
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.
Keywords: institutional investors; financial crisis; securitized bonds; corporate bonds; liquidity
JEL Codes: G01; G11; G22; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional investors' exposure to securitized bonds (G23) | Greater selling pressure on corporate bonds (G32) |
| Institutional investors' exposure to securitized bonds (G23) | Price declines in corporate bonds (G12) |
| Higher exposure to securitized bonds (G12) | More negative price impact on lower-rated corporate bonds (G12) |
| Mutual funds' high sensitivity to performance (G23) | Greater selling pressure on corporate bonds (G32) |
| Mutual funds' shorter investment horizons (G23) | Greater selling pressure on corporate bonds (G32) |
| Insurance companies' longer-term investment horizons (G22) | Less selling pressure on corporate bonds (G39) |