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Dynamic Debt Runs

By Zhiguo He and Wei Xiong


Firms commonly spread out their debt expirations across time to reduce the liquidity risk generated by large quantities of debt expiring at the same time. By doing so, they introduce a dynamic coordination problem. In deciding whether to rollover his debt, each maturing creditor is concerned about the rollover decisions of other creditors whose debt matures during his next contract period. We develop a model with a time-varying firm fundamental and a staggered debt structure to analyze this problem. We derive a unique threshold equilibrium, in which fear of a firm’s future rollover risk can lead to preemptive runs. Our model characterizes fundamental volatility, asset illiquidity and debt maturity as determinants of such dynamic runs

Topics: Rollover Risk, Debt Crisis, Dynamic Coordination We thank Viral Acharya, Markus Brunnermeier, Doug Diamond, Itay Goldstein, Milton Harris, Christopher
Year: 2010
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