Research

Financial Crisis Fueled by Liquidity-driven Sales of Corporate Bonds

Associate Professor Ayako Yasuda, in collaboration with Professor Alberto Marconi of INSEAD and Professor Massimo Massa of Tilburg University, the Netherlands, has researched the behavior of investors who were significantly exposed to toxic assets during the 2007–08 financial crisis.

Using a novel dataset of institutional investors’ bond holdings, they examined how the crisis moved from the securitized bond market to the corporate bond market via investors’ joint ownership of these bonds. Institutional investors, intoxicated by mortgage-backed and other securitized bonds, experienced greater pressure to liquidate corporate assets and sell them at a lower price following the onset of the crisis. The result: corporate bond prices plummeted.

“These institutional investors—in particular, the bond mutual funds—played a critical role in the contagion of the market shock that moved from the subprime market into the broader economy,” said Yasuda.

She has presented this research at UC San Diego’s Rady School of Management; University of Oregon’s Lundquist College of Business; the Financial Crisis conference organized by the National Bureau of Economic Research in New York City; and at the Western Finance Association Annual Meetings in Victoria, B.C. (Canada).

Yasuda’s research with Professor Andrew Metrick of the Yale University School of Management was published in the June issue of Review of Financial Studies. Using a novel dataset, “The Economics of Private Equity Funds” details the differences between the value venture capitalists and buyout fund managers bring to large and small companies. It is among the top 100 most-downloaded research papers in the Social Science Research Network.

Yasuda and Metrick’s textbook, Venture Capital and the Finance of Innovation (Wiley & Sons, September 2010), includes a Web learning tool that has drawn the interest of the Institutional Limited Partners Association, a networking group of more than 230 member organizations worldwide that manage assets of more than $5 trillion.

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