Review article: Debt Markets During the Crisis

Debt Markets During the Crisis Failure to see the big picture led to a breakdown, Based on the Research of Arvind Krishnamurthy

  • “The financial crisis that provoked the Great Recession had severe effects on debt markets, including the corporate bond and mortgage-backed securities markets. The effects included a huge premium on liquidity, the loss of capital, and rising risk for counterparties, the partners in debt market transactions. On one hand, the size of the impact hardly surprised the experts. “Financial crises seem much more prominent in debt markets than in equity markets, because investors in debt markets are essentially playing with borrowed money,” says Arvind Krishnamurthy, a professor of finance at the Kellogg School of Management. Debt markets are most actively traded by banks, hedge funds, insurance companies, and similar institutions. On the other hand, diagnosing exactly why the debt markets faltered so spectacularly has proved difficult. Several researchers and industry insiders have identified parts of the puzzle, but until now no one has elicited a broad theme to describe what went wrong.”
  • How Debt Markets Have Malfunctioned in the Crisis, Journal of Economic Perspectives—Volume 24, Number 1—Winter 2010—Pages 3–28
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