Credit Market Freezes

Efraim Benmelech and Nittai K. Bergman

NBER Macroeconomics Annual, 2018, vol. 32, issue 1, 493 - 526

Abstract: Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-2009, the structured credit market froze, issuance of corporate bonds declined, and secondary credit markets became highly illiquid. In this paper, we analyze liquidity in bond markets during financial crises and compare two main theories of liquidity in markets: (1) asymmetric information and adverse selection, and (2) heterogenous beliefs. Analyzing the 1873 financial crisis as well as the 2008-2009 crisis, we find that when bond value deteriorates, bond illiquidity increases, consistent with an adverse-selection model of the information sensitivity of debt contracts. While we show that the adverse-selection model of debt liquidity explains a large portion of the rise in illiquidity, we find little support for the hypothesis that opinion dispersion explains illiquidity in financial crises.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1086/696065 (application/pdf)
http://dx.doi.org/10.1086/696065 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Chapter: Credit Market Freezes (2017)
Working Paper: Credit Market Freezes (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:macann:doi:10.1086/696065

Access Statistics for this article

More articles in NBER Macroeconomics Annual from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().