Diffusion and herding in financial markets: Mortgage securitization and the Spanish banking crisis

• In Event: 3134 - Economic Sociology Regular Session: Finance, Markets, and the State

Abstract

Theories of financial contagion and herd behavior share important properties with diffusion models in sociology and organization studies. However, both theoretical models and empirical tests of financial ignore relational models of network-driven diffusion processes. In this paper, we use a network approach to study the diffusion of a new (and ultimately destructive) financial technology, mortgage-backed securities (MBS) in Spain. This is an informative case because the Spanish MBS market emerged de novo in the 1990s, and because of key institutional features of this market. We test for social influence processes based on communicative, competitive and collaborative relations (as well as spatial proximity) using network autocorrelation models. Results show that Spanish savings banks tended to emulate the behavior of their historical competitors, but we find no evidence of communicative or collaborative diffusion processes. This result is robust to controlling for a variety of relational and bank-level properties and strongly mitigates concern about confounding homophily effects typically found in diffusion studies.

Authors

• Tod Stewart Van Gunten, University of Edinburgh

• Jacob Habinek, Linköping University