Munich Personal RePEc Archive

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

Lysandrou, Photis and Shabani, Mimoza (2017): The Greenspan conundrum of 2005-7 and the acceleration in US ABCP supply: a single ‘reach for yield’ story.

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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

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