The Maturity Rat Race
Markus K. Brunnermeier
Princeton University - Department of Economics
Columbia Business School - Finance and Economics
NBER Working Paper No. w16607
We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.
Number of Pages in PDF File: 38
Date posted: December 18, 2010
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