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The Greenspan conundrum of 2005-7 and the acceleration in US ABCP supply: a single ‘reach for yield’ story

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  • Lysandrou, Photis
  • Shabani, Mimoza

Abstract

The period 2005 through to mid-2007 saw a sharp acceleration in the rate of supply of US asset backed commercial paper (ABCP). This same period also saw the yield on 10-year US treasury bonds remain stubbornly below the federal funds rate, an event so unusual as to cause the then Chairman of the Federal reserve, Alan Greenspan, to talk of a bond yield ‘conundrum’. The central hypothesis of this paper is that these parallel developments were causally linked, with the reach for yield on the part of institutional investors being the key linking factor. To support this hypothesis, we use a dynamic system Generalized Method of Moments (GMM) model to estimate the relationship between US ABCP issuance in the pre-crisis period and such determining factors as short term interest rates, the strength of demand for US ABCP from US institutional money market mutual funds (MMMFs), the geographical breakdown of the bank-sponsored conduits that were the principal suppliers of ABCP and conduit characteristics

Suggested Citation

  • Lysandrou, Photis & Shabani, Mimoza, 2017. "The Greenspan conundrum of 2005-7 and the acceleration in US ABCP supply: a single ‘reach for yield’ story," MPRA Paper 79917, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:79917
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    References listed on IDEAS

    as
    1. Viral V. Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09," NBER Working Papers 16079, National Bureau of Economic Research, Inc.
    2. Bernanke, B.S., 2011. "International capital flows and the returns to safe assets in the United States 2003-2007," Financial Stability Review, Banque de France, issue 15, pages 13-26, February.
    3. Carlos Arteta & Mark Carey & Ricardo Correa & Jason Kotter, 2020. "Revenge of the Steamroller: ABCP as a Window on Risk Choices," Review of Finance, European Finance Association, vol. 24(3), pages 497-528.
    4. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
    5. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 219-234.
    6. Goda, Thomas & Lysandrou, Photis & Stewart, Chris, 2013. "The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 113-136.
    7. Thomas Goda & Photis Lysandrou, 2014. "The contribution of wealth concentration to the subprime crisis: a quantitative estimation," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 38(2), pages 301-327.
    8. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
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    11. Viral V Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 37-73, August.
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    More about this item

    Keywords

    Greenspan conundrum; asset backed commercial paper; reach for yield;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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