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

73 Pages Posted: 18 Oct 2015 Last revised: 7 Jan 2020

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: June 16, 2019

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

Suggested Citation

Foley-Fisher, Nathan and Narajabad, Borghan and Verani, Stephane, Self-Fulfilling Runs: Evidence from the U.S. Life Insurance Industry (June 16, 2019). Available at SSRN: https://ssrn.com/abstract=2674708 or http://dx.doi.org/10.2139/ssrn.2674708

Nathan Foley-Fisher

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 (Contact Author)

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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