Working Paper | 2014

The Rise and Fall of Demand for Securitizations

by Sergey Chernenko, Samuel G. Hanson and Adi Sunderam

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.

Keywords: Debt Securities; Financial Markets; Financial Crisis;

Citation:

Chernenko, Sergey, Samuel G. Hanson, and Adi Sunderam. "The Rise and Fall of Demand for Securitizations." Working Paper, December 2014.