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 2), pages 175-187.
    3. Oecd, 2008. "DAC Peer Review of Denmark," OECD Journal on Development, OECD Publishing, vol. 8(4), pages 7-125.
    4. 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.
    5. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 171-177.
    6. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 171-179.
    7. 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.
    8. Oecd, 2009. "Monitoring Review of Korea," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 9(3), pages 107-137.
    9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    10. Oecd, 2008. "DAC Peer Review of Canada," OECD Journal on Development, OECD Publishing, vol. 8(4), pages 263-387.
    11. Timothy Q. Cook & Robert K. LaRoche, 1993. "Instruments of the money market," Monograph, Federal Reserve Bank of Richmond, number 1993iotm.
    12. (Various), 2007. "Book Reviews," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 187-192.
    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. Betakova, Vendula & Vojar, Jiri & Sklenicka, Petr, 2015. "Wind turbines location: How many and how far?," Applied Energy, Elsevier, vol. 151(C), pages 23-31.
    5. 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.
    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. Michiel Bijlsma & Wim Suyker, 2008. "The credit crisis and the Dutch economy... in eight frequently asked questions," CPB Memorandum 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    8. 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.
    9. Dottori, Davide & Manna, Michele, 2016. "Strategy and tactics in public debt management," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 1-25.
    10. 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.
    11. Zagonov, Maxim, 2011. "Securitization and bank intermediation function," MPRA Paper 34961, University Library of Munich, Germany, revised Sep 2011.
    12. Stephen Morris & Hyun Song Shin, 2012. "Contagious Adverse Selection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 1-21, January.
    13. Michiel Bijlsma & Jeroen Klomp & Sijmen Duineveld, 2010. "Systemic risk in the financial sector; a review and synthesis," CPB Document 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    14. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    15. 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).
    16. Jaehoon Hahn & Hangyong Lee, 2009. "Financial Constraints, Debt Capacity, and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(2), pages 891-921, April.
    17. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    18. Kuncl, Martin, 2019. "Securitization under asymmetric information over the business cycle," European Economic Review, Elsevier, vol. 111(C), pages 237-256.
    19. 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.
    20. Siddarth Srinivasan & Jamie Morgenstern, 2021. "Auctions and Prediction Markets for Scientific Peer Review," Papers 2109.00923, arXiv.org.

    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.

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

    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 hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.