Academic

Covitz, Liang, & Suarez on Panic in Asset-Backed Commerical Paper Markets

By Lawrence Solum

Daniel M. Covitz, Nellie Liang and Gustavo Suarez (Federal Reserve Board - Division of Research & Statistics, Federal Reserve Board and Board of Governors of the Federal Reserve System) have posted The Anatomy of a Financial Crisis: the Evolution of Panic-Driven Runs in the Asset-Backed Commercial Paper Market on SSRN. Here is the abstract:

In this paper, we measure and analyze runs in the asset-backed commercial paper (ABCP) market during the financial turmoil of 2007. While it has been suggested that commercial paper markets may be prone to runs, we are the first to conduct a comprehensive empirical analysis of runs in the ABCP market. We contribute to the general understanding of runs using a rich issue-level data set of ABCP transactions for all programs in the US market, where we define a run as no issuance at a commercial paper program with a substantial amount of maturing paper. In addition to identifying runs on ABCP programs, we follow the literature on bank runs and attempt to disentangle runs driven by panics from runs driven by deteriorating fundamentals. Our analysis uses a rich cross section of data to link runs to a number of fundamentals, including program and sponsor types, ratings, and contract characteristics. We attribute increases in the likelihood of runs across all programs, after controlling for fundamentals, to panic. Our analysis yields substantial evidence of runs in the ABCP market in 2007. Moreover, our results suggest that the nature of runs evolves rapidly through a crisis, with widespread runs taking place during the first weeks of the turmoil, but with runs later on centered on fundamentally impaired programs.

Full post as published by Legal Theory Blog on March 24, 2009 (boomark / email).