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Dynamic Debt Runs

Zhiguo He
University of Chicago, Booth School of Business

Wei Xiong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)


February 09, 2010

AFA 2010 Atlanta Meetings Paper

Abstract:     
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.

Keywords: Rollover Risk, Debt Crisis, Dynamic Coordination

JEL Classifications: G01, G20

Working Paper Series

Date posted: March 13, 2009 ; Last revised: February 09, 2010

Suggested Citation

He, Zhiguo and Xiong, Wei, Dynamic Debt Runs (February 09, 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1358672


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Contact Information

Zhiguo He (Contact Author)
University of Chicago, Booth School of Business ( email )
5807 South Woodlawn Ave
Chicago, IL 60637
United States
Wei Xiong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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