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A Note on Liquidity Risk Management

13 Pages Posted: 19 Jan 2009 Last revised: 17 Jun 2009

Markus K. Brunnermeier

Princeton University - Department of Economics

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2009

Abstract

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

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

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Motohiro Yogo (Contact Author)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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