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

53 Pages Posted: 15 Aug 2009 Last revised: 1 Dec 2010

See all articles by Alberto Manconi

Alberto Manconi

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Massimo Massa

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: November 18, 2010

Abstract

Using a novel data set of institutional investors’ bond holdings, we study a transmission mechanism that explains the contagion of the financial crisis of 2007-2008 from the securitized bond market to the corporate bond market. We argue that the crisis shock was propagated by the behavior of institutional investors, which held both securitized bonds and corporate bonds and had to liquidate portions of their portfolios due to their liquidity needs. When securitized bonds became “toxic” in August 2007, mutual funds facing liquidity needs retained the now illiquid securitized bonds and sold their corporate bond holdings. Funds with negative contemporaneous flows, high turnover, or high flow volatility liquidated greater portions of their corporate bond holdings than others. The average mutual fund tended to sell more junk bonds than investment-grade bonds. Yield spreads and bond sales went up by more for corporate bonds whose pre-crisis bondholders’ portfolios were more heavily exposed to securitized bonds, compared to same-issuer corporate bonds held by unexposed mutual funds. In contrast, insurance companies sold little regardless of their exposure to securitized bonds as long as they were above the minimum capital ratio threshold. These findings suggest that mutual funds with high liquidity needs that were left with exposure to now illiquid securitized bonds at the onset of the crisis played a role in propagating the crisis from securitized bonds to corporate bonds.

Keywords: crisis transmission, securitized debt, corporate bonds

JEL Classification: G1, G2

Suggested Citation

Manconi, Alberto and Massa, Massimo and Yasuda, Ayako, The Role of Institutional Investors in Propagating the Crisis of 2007-2008 (November 18, 2010). UC Davis Graduate School of Management Research Paper No. 04-10. Available at SSRN: https://ssrn.com/abstract=1454831 or http://dx.doi.org/10.2139/ssrn.1454831

Alberto Manconi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://mypage.unibocconi.eu/albertomanconi/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
475
Abstract Views
2,656
rank
44,718
PlumX Metrics