The Flight from Maturity
42 Pages Posted: 25 Mar 2014 Last revised: 6 Jun 2015
Date Written: May 22, 2015
Why did the failure of Lehman Brothers make the financial crisis dramatically worse? The financial crisis was a process of a build-up of risk during the crisis prior to the Lehman failure. During the crisis market participants tried to preserve an option to withdraw by shortening maturities --- the “flight from maturity”. This flight from maturity was manifested in a steepening of the term structures of spreads in money markets. With increasingly short maturities, lenders created the possibility of fast exit. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility. “Tail risk” is endogenous.
Keywords: financial crises
JEL Classification: E32, G10
Suggested Citation: Suggested Citation