The Rise and Fall of Demand for Securitizations

Fisher College of Business Working Paper No. 2014-03-16

Charles A. Dice Center Working Paper No. 2014-16

50 Pages Posted: 19 Dec 2014

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Samuel Gregory Hanson

Harvard University - Business School (HBS)

Adi Sunderam

Harvard University - Business School (HBS)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2014

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, mutual funds, insurance companies, financial crises, fire sales, risk taking, reinforcement learning

JEL Classification: G01, G22, G23

Suggested Citation

Chernenko, Sergey and Hanson, Samuel Gregory and Sunderam, Adi, The Rise and Fall of Demand for Securitizations (December 1, 2014). Fisher College of Business Working Paper No. 2014-03-16, Charles A. Dice Center Working Paper No. 2014-16, Available at SSRN: https://ssrn.com/abstract=2539664 or http://dx.doi.org/10.2139/ssrn.2539664

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

Samuel Gregory Hanson

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Adi Sunderam

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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