The Flight from Maturity
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.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Gorton was a consultant to AIG Financial Products during 1996-2008.
Gary Gorton & Andrew Metrick & Lei Xie, 2020. "The flight from maturity," Journal of Financial Intermediation, .