The Rise and Fall of Demand for Securitizations
Charles A. Dice Center Working Paper No. 2014-16
50 Pages Posted: 19 Dec 2014
Date Written: December 1, 2014
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: Suggested Citation