TY  - JOUR
AU  - Benmelech, Efraim
AU  - Bergman, Nittai K
TI  - Credit Market Freezes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 23512
PY  - 2017
Y2  - June 2017
DO  - 10.3386/w23512
UR  - http://www.nber.org/papers/w23512
L1  - http://www.nber.org/papers/w23512.pdf
N1  - Author contact info:
Efraim Benmelech
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-4462
Fax: 847/491-5719
E-Mail: e-benmelech@kellogg.northwestern.edu

Nittai Bergman
Coller School of Management
and Berglas School of Economics
Tel Aviv University
Tel Aviv-Yafo
Israel
E-Mail: nbergman@tauex.tau.ac.il
M1  - published as Efraim Benmelech, Nittai K. Bergman. "Credit Market Freezes," in Martin Eichenbaum and Jonathan A. Parker, editors, "NBER Macroeconomics Annual 2017, volume 32" University of Chicago Press (2018)

M3  - presented at "32nd Annual Conference on Macroeconomics", April 7-8, 2017
AB  - Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-09, 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 2008-09 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.
ER  -