Dynamic Debt Runs and Financial Fragility: Evidence from the 2007 ABCP Crisis

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 ten-fold 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.

Keywords: runs, financial crises, structural estimation, asset-backed commercial paper

JEL Classification: G01, G21, G28