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The Behavior of Intoxicated Investors: The Role of Institutional Investors in Propagating the Crisis of 2007-2008

Alberto Manconi

Tilburg University

Massimo Massa

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

August 16, 2010

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.

Number of Pages in PDF File: 78

Keywords: crisis transmission, securitized debt, corporate bonds

JEL Classification: G1, G2

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Date posted: August 17, 2010  

Suggested Citation

Manconi, Alberto and Massa, Massimo and Yasuda, Ayako, The Behavior of Intoxicated Investors: The Role of Institutional Investors in Propagating the Crisis of 2007-2008 (August 16, 2010). Available at SSRN: http://ssrn.com/abstract=1659547 or http://dx.doi.org/10.2139/ssrn.1659547

Contact Information

Alberto Manconi
Tilburg University ( email )
PO Box 19153
Tilburg, DC 5000 LE
Massimo Massa
INSEAD - Finance ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)


Ayako Yasuda (Contact Author)
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)
HOME PAGE: http://www.ayakoyasuda.com

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References:  43
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