Working Paper: NBER ID: w20777
Authors: Sergey Chernenko; Samuel G. Hanson; Adi Sunderam
Abstract: Collateralized debt obligations (CDOs) and private-label mortgage-backed securities (MBS) backed by nonprime loans played a central role in the recent financial crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers’ and mutual funds’ bond holdings, we find considerable heterogeneity in investor demand for securitizations in the pre-crisis period. We argue that both investor beliefs and incentives help to explain this variation in demand. By contrast, our data paints a more uniform picture of investor behavior in the crisis. Consistent with theories of optimal liquidation, investors largely traded in more liquid securities such as government-guaranteed MBS to meet their liquidity needs during the crisis.
Keywords: securitization; CDOs; MBS; financial crisis; investor behavior
JEL Codes: G01; G12; G22; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor beliefs (G40) | Mutual fund demand for nontraditional securitizations (G23) |
| Inexperienced mutual fund managers (G23) | Demand for nontraditional securitizations (G19) |
| Prior firsthand experiences (C90) | Caution in investment decisions during housing boom (G51) |
| Distorted incentives (H31) | Demand for nontraditional securitizations among insurance companies (G22) |
| Larger insurers (G52) | Holdings of nontraditional securitizations (G19) |
| External managers (M12) | Holdings of nontraditional securitizations (G19) |