IDEAS home Printed from https://ideas.repec.org/a/aea/jecper/v24y2010i1p29-50.html
   My bibliography  Save this article

When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009

Author

Listed:
  • Marcin Kacperczyk
  • Philipp Schnabl

Abstract

Commercial paper is a short-term debt instrument issued by large corporations. The commercial paper market has long been viewed as a bastion of high liquidity and low risk. But twice during the financial crisis of 2007-2009, the commercial paper market nearly dried up and ceased being perceived as a safe haven. Major interventions by the Federal Reserve, including large outright purchases of commercial paper, were eventually used to support both issuers of and investors in commercial paper. We will offer an analysis of the commercial paper market during the financial crisis. First, we describe the institutional background of the commercial paper market. Second, we analyze the supply and demand sides of the market. Third, we examine the most important developments during the crisis of 2007-2009. Last, we discuss three explanations of the decline in the commercial paper market: substitution to alternative sources of financing by commercial paper issuers, adverse selection, and institutional constraints among money market funds.

Suggested Citation

  • Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    • Handle: RePEc:aea:jecper:v:24:y:2010:i:1:p:29-50
    Note: DOI: 10.1257/jep.24.1.29
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.24.1.29
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    2. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 171-177.
    3. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 171-179.
    4. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Rational Attention Allocation Over the Business Cycle," NBER Working Papers 15450, National Bureau of Economic Research, Inc.
    5. Oecd, 2009. "Monitoring Review of Korea," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 9(3), pages 107-137.
    6. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 187-192.
    7. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 175-187.
    8. Oecd, 2008. "DAC Peer Review of Denmark," OECD Journal on Development, OECD Publishing, vol. 8(4), pages 7-125.
    9. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    10. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    11. Oecd, 2008. "DAC Peer Review of Canada," OECD Journal on Development, OECD Publishing, vol. 8(4), pages 263-387.
    12. Timothy Q. Cook & Robert K. LaRoche, 1993. "Instruments of the money market," Monograph, Federal Reserve Bank of Richmond, number 1993iotm.
    13. Timothy Q. Cook & Robert K. LaRoche, 1993. "Instruments of the money market (foreword)," Monograph, Federal Reserve Bank of Richmond, number 1993iotmm.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andreas Ortmann & Benoît Walraevens, 2012. "Adam Smith, Philosopher and Man of the World," Post-Print halshs-00756341, HAL.
    2. José Cendejas Bueno & Cecilia Font de Villanueva, 2015. "Convergence of inflation with a common cycle: estimating and modelling Spanish historical inflation from the 16th to the 18th centuries," Empirical Economics, Springer, vol. 48(4), pages 1643-1665, June.
    3. Edmund Byrne, 2014. "Towards Enforceable Bans on Illicit Businesses: From Moral Relativism to Human Rights," Journal of Business Ethics, Springer, vol. 119(1), pages 119-130, January.
    4. Hofstad, Ole & Araya, Meley Mekonen, 2015. "Optimal wood harvest in miombo woodland considering REDD+payments — A case study at Kitulangalo Forest Reserve, Tanzania," Forest Policy and Economics, Elsevier, vol. 51(C), pages 9-16.
    5. Betakova, Vendula & Vojar, Jiri & Sklenicka, Petr, 2015. "Wind turbines location: How many and how far?," Applied Energy, Elsevier, vol. 151(C), pages 23-31.
    6. Louise Bedsworth, 2012. "California’s local health agencies and the state’s climate adaptation strategy," Climatic Change, Springer, vol. 111(1), pages 119-133, March.
    7. Valérie Revest & Alessandro Sapio, 2012. "Financing technology-based small firms in Europe: what do we know?," Small Business Economics, Springer, vol. 39(1), pages 179-205, July.
    8. Waters, James, 2014. "Introduction of innovations during the 2007-8 financial crisis: US companies compared with universities," MPRA Paper 59016, University Library of Munich, Germany.
    9. Zagonov, Maxim, 2011. "Securitization and bank intermediation function," MPRA Paper 34961, University Library of Munich, Germany, revised Sep 2011.
    10. Gunay, Samet, 2020. "Seeking causality between liquidity risk and credit risk: TED-OIS spreads and CDS indexes," Research in International Business and Finance, Elsevier, vol. 52(C).
    11. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, April.
    12. Kuncl, Martin, 2019. "Securitization under asymmetric information over the business cycle," European Economic Review, Elsevier, vol. 111(C), pages 237-256.
    13. Peter Docherty & Ron Bird & Timo Henckel & Gordon Menzies, 2016. "Australian prudential regulation before and after the global financial crisis," CAMA Working Papers 2016-49, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    14. Siddarth Srinivasan & Jamie Morgenstern, 2021. "Auctions and Peer Prediction for Academic Peer Review," Papers 2109.00923, arXiv.org, revised May 2023.
    15. Gorton, Gary & Metrick, Andrew & Xie, Lei, 2021. "The flight from maturity," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    16. Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
    17. Athreya, Kartik, 2006. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2051-2079, November.
    18. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    19. Valentina Peruzzi, 2017. "Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4378-4393, September.
    20. Frederic Malherbe, 2014. "Self-Fulfilling Liquidity Dry-Ups," Journal of Finance, American Finance Association, vol. 69(2), pages 947-970, April.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:jecper:v:24:y:2010:i:1:p:29-50. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.