Working Paper: NBER ID: w15538
Authors: Marcin Kacperczyk; Philipp Schnabl
Abstract: Commercial paper is one of the largest money market instruments and has long been viewed as a safe haven for investors seeking low risk. However, during the financial crisis of 2007-2009, the commercial paper market experienced twice the modern-day equivalent of a bank run with investors unwilling to refinance maturing commercial paper. We analyze the supply of and demand for commercial paper and show that, in contrast to previous turbulent episodes, the crisis centered on commercial paper issued by, or guaranteed by, financial institutions. We describe the importance of Federal Reserve's interventions in restoring stability of the market. Finally, we propose three possible explanations for the sharp decline of the commercial paper market: substitution to alternative sources of financing by commercial paper issuers, adverse selection, and institutional constraints among money market funds.
Keywords: commercial paper; financial crisis; federal reserve; money market funds; risk perception
JEL Codes: G01; G11; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bankruptcy of Bear Stearns (G33) | Drop in asset-backed commercial paper demand (E44) |
| Bankruptcy of Bear Stearns (G33) | Lack of refinancing for commercial paper (G32) |
| Federal Reserve's interventions (E52) | Demand for commercial paper (E41) |
| Federal Reserve's interventions (E52) | Restoration of investor confidence (G18) |
| Higher perceived risks (D81) | Reduced issuance of commercial paper (G32) |
| Changes in risk assessment (D81) | Decrease in commercial paper holdings (G21) |
| Federal Reserve's direct purchases of commercial paper (E52) | Restoration of investor confidence (G18) |
| Federal Reserve's direct purchases of commercial paper (E52) | Rebound in the market (E32) |