Self-Fulfilling Runs: Evidence from the U.S. Life Insurance Industry

FEDS Working Paper No. 2015-32r1

http://dx.doi.org/10.17016/FEDS.2015.032r1

51 Pages Posted: 31 May 2015

See all articles by Nathan Foley-Fisher

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System

Borghan Narajabad

Board of Governors of the Federal Reserve System

Stephane Verani

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: February 2016

Abstract

The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms’ liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that 40 percent of the $18 billion run on life insurers by institutional investors during the summer of 2007 was due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

Keywords: Shadow banking, self-fulfilling runs, life insurance companies, funding agreement-backed securities

JEL Classification: G01, G22, G23, E44

Suggested Citation

Foley-Fisher, Nathan and Narajabad, Borghan and Verani, Stephane, Self-Fulfilling Runs: Evidence from the U.S. Life Insurance Industry (February 2016). FEDS Working Paper No. 2015-32r1, http://dx.doi.org/10.17016/FEDS.2015.032r1, Available at SSRN: https://ssrn.com/abstract=2612023 or http://dx.doi.org/10.2139/ssrn.2612023

Nathan Foley-Fisher (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Borghan Narajabad

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephane Verani

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/stephane-verani.htm

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