A Note on Liquidity Risk Management
Markus K. Brunnermeier
Princeton University - Department of Economics
Federal Reserve Bank of Minneapolis
January 16, 2009
American Economic Review, Vol. 99, No. 2, 2009
When a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.
Number of Pages in PDF File: 13
Keywords: Funding liquidity, Hedging, Maturity structure, Risk management
JEL Classification: G32, G33Accepted Paper Series
Date posted: January 19, 2009 ; Last revised: June 17, 2009
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