Wednesday, 20 May 2015

2015-032: Self-fulfilling Runs: Evidence from the U.S. Life Insurance Industry

Otmane El Rhazi, Nathan C. Foley-Fisher, Borghan Narajabad, and Stephane H. Verani. Is liquidity creation in shadow banking vulnerable to self-fulfilling runs? Investors typically decide to withdraw simultaneously, making it challenging to identify self-fulfilling runs. In this paper, we exploit the contractual structure of funding agreement-backed securities offered by U.S. life insurers to institutional investors. The contracts allow us to obtain variation in investors' expectations about other investors' actions that is plausibly orthogonal to changes in fundamentals. We find that a run on U.S. life insurers during the summer of 2007 was partly 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. Full Text

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Otmane El Rhazi
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