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Rollover Risk and Market Freezes

60 Pages Posted: 9 Mar 2009 Last revised: 9 Aug 2010

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Douglas M. Gale

New York University (NYU) - Department of Economics

Tanju Yorulmazer

University of Amsterdam - Faculty of Economics and Business (FEB)

Multiple version iconThere are 4 versions of this paper

Date Written: February 17, 2010

Abstract

We present a model that can explain a sudden drop in the amount of money that can be borrowed against an asset, even in the absence of asymmetric information or fears about the value of the collateral. Three features of the model are essential: (i) the debt has a much shorter tenor than the assets and needs to rolled over frequently; (ii) in the event of default by the borrower, the collateral is sold by the creditors and there is a (small) liquidation cost; (iii) a significant fraction of the potential buyers of the collateral also relies on short-term debt finance. Under these conditions, the debt capacity of the assets (the maximum amount that can be borrowed using the securities as collateral) can be much less than the fundamental value, and in fact, equal the minimum possible value of the asset. This is true even if the fundamental value of the assets is currently high. In particular, a small change in the fundamental value of the assets can be associated with a sudden collapse in the debt capacity. The crisis of 2007-09 was characterized by just such a sudden freeze in the market for short-term, asset-backed financing.

Keywords: financial crisis, credit risk, liquidation cost, repo, secured borrowing, asset-backed commercial paper.

JEL Classification: G12, G21, G24, G32, G33, D

Suggested Citation

Acharya, Viral V. and Gale, Douglas M. and Yorulmazer, Tanju, Rollover Risk and Market Freezes (February 17, 2010). NYU Working Paper No. FIN-08-030. Available at SSRN: https://ssrn.com/abstract=1354517

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

Tanju Yorulmazer

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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