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Dynamic debt runs and financial fragility: Evidence from the 2007 ABCP crisis

Schroth, E., Suarez, G. A. and Taylor, L. A. (2014). Dynamic debt runs and financial fragility: Evidence from the 2007 ABCP crisis. Journal of Financial Economics, 112(2), pp. 164-189. doi: 10.1016/j.jfineco.2014.01.002

Abstract

We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed tenfold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility.

Publication Type: Article
Publisher Keywords: Runs; Financial crises; Structural estimation; Asset-backed commercial paper
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/14004
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