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

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 at least 40 percent of the $18 billion run on life insurers by institutional investors during the 2007-08 crisis was amplified by 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