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The Flight from Maturity

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  • Gary B. Gorton
  • Andrew Metrick
  • Lei Xie

Abstract

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. Market participants tried to preserve an option or exit by shortening maturities – the “flight from maturity”. 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. We produce a chronology of the crisis which formalizes the dynamics of the crisis. A crisis is a dynamic process in which “tail risk” is endogenous.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20027.

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Date of creation: Apr 2014
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Handle: RePEc:nbr:nberwo:20027

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  1. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  2. Bai, Jushan, 2010. "Common breaks in means and variances for panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 157(1), pages 78-92, July.
  3. Zhiguo He & In Gu Khang & Arvind Krishnamurthy, 2010. "Balance Sheet Adjustments in the 2008 Crisis," NBER Working Papers 15919, National Bureau of Economic Research, Inc.
  4. Bin Chen & Yongmiao Hong, 2012. "Testing for Smooth Structural Changes in Time Series Models via Nonparametric Regression," Econometrica, Econometric Society, Econometric Society, vol. 80(3), pages 1157-1183, 05.
  5. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199734153, October.
  6. Zhiguo He & In Gu Khang & Arvind Krishnamurthy, 2010. "Balance Sheet Adjustments during the 2008 Crisis," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 58(1), pages 118-156, August.
  7. Gr da, Cormac & White, Eugene N., 2003. "The Panics of 1854 and 1857: A View from the Emigrant Industrial Savings Bank," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 63(01), pages 213-240, March.
  8. Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.
  9. Gorton, Gary, 1999. "Pricing free bank notes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(1), pages 33-64, August.
  10. Vladimir Kotomin & Drew Winters, 2006. "Quarter-End Effects in Banks: Preferred Habitat or Window Dressing?," Journal of Financial Services Research, Springer, Springer, vol. 29(1), pages 61-82, February.
  11. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, American Economic Association, vol. 76(1), pages 125-40, March.
  12. Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 45(02), pages 277-283, June.
  13. Musto, David K, 1997. " Portfolio Disclosures and Year-End Price Shifts," Journal of Finance, American Finance Association, American Finance Association, vol. 52(4), pages 1563-88, September.
  14. Allen, Linda & Saunders, Anthony, 1992. "Bank window dressing: Theory and evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 16(3), pages 585-623, June.
  15. Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 346-97, April.
  16. Mark D. Griffiths & Drew B. Winters, 2005. "The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(4), pages 1337-1364, July.
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