13 Pages Posted: 19 Jan 2009 Last revised: 17 Jun 2009
Date Written: January 16, 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.
Keywords: Funding liquidity, Hedging, Maturity structure, Risk management
JEL Classification: G32, G33
Suggested Citation: Suggested Citation
Brunnermeier, Markus K. and Yogo, Motohiro, A Note on Liquidity Risk Management (January 16, 2009). American Economic Review, Vol. 99, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=1329132
By Marianne Ojo