Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    The Rise and Fall of Demand for Securitizations
    26 Jan 2015Working Paper Summaries

    The Rise and Fall of Demand for Securitizations

    by Sergey Chernenko, Samuel G. Hanson and Adi Sunderam
    At the heart of the recent financial crisis were nontraditional securitizations, especially collateralized debt obligations and private-label mortgage-backed securities backed by nonprime loans. Demand for these securities helped feed the housing boom during the early and mid-2000s, while rapid declines in their prices during 2007 and 2008 generated large losses for financial intermediaries, ultimately imperiling their soundness and triggering a full-blown crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers' and mutual funds' holdings of both traditional and nontraditional securitizations, this paper begins to shed light on the economic forces that drove the demand for securitizations before and during the crisis. Among the findings, variation across securitization types and investors is key to understanding the crisis. Beliefs appear to have been an important driver of mutual fund holdings of nontraditional securitizations. Results also underscore the importance of optimal liquidity management in the context of fire sales. Key concepts include:
    • Inexperienced mutual fund managers invested significantly more in these products than experienced managers.
    • Beliefs-shaped by past firsthand experiences-played an important role. Managers who had suffered through the market dislocations of 1998 invested substantially less in nontraditional securitizations than those who had not.
    • For insurance companies, incentives appear to have played an important role, though the nature of the relevant incentive conflict seems to have varied across small and larger insurance firms.
    LinkedIn
    Email

    Author 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: December 2014
    • HBS Working Paper Number: NBER 20777
    • Faculty Unit(s): Finance
      Trending
        • 08 Sep 2022
        • Book

        Gen Xers and Millennials, It’s Time To Lead. Are You Ready?

        • 28 Mar 2023
        • Research & Ideas

        The FDA’s Speedy Drug Approvals Are Safe: A Win-Win for Patients and Pharma Innovation

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 14 Mar 2023
        • In Practice

        What Does the Failure of Silicon Valley Bank Say About the State of Finance?

    Samuel G. Hanson
    Samuel G. Hanson
    William L. White Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Adi Sunderam
    Adi Sunderam
    Willard Prescott Smith Professor of Corporate Finance
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Accounting
    • Finance
    • North & Central America
    • United States

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College