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

68 Pages Posted: 14 Mar 2012 Last revised: 28 Nov 2013

See all articles by Enrique J. Schroth

Enrique J. Schroth

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Gustavo Suarez

Board of Governors of the Federal Reserve System

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: August 23, 2013

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

Suggested Citation

Schroth, Enrique J. and Suarez, Gustavo and Taylor, Lucian A., Dynamic Debt Runs and Financial Fragility: Evidence from the 2007 ABCP Crisis (August 23, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2020925 or http://dx.doi.org/10.2139/ssrn.2020925

Enrique J. Schroth (Contact Author)

EDHEC Business School ( email )

393, Promenade Des Anglais
Nice, 06202
France
+33493186939 (Phone)

HOME PAGE: http://https://www.edhec.edu/en/faculty-and-researchers/schroth-enrique-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gustavo Suarez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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