Dynamic Debt Runs

46 Pages Posted: 13 Mar 2009 Last revised: 11 Nov 2010

See all articles by Zhiguo He

Zhiguo He

University of Chicago - Finance

Wei Xiong

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

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Date Written: August 6, 2010

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 with fear of a firm's future rollover risk driving preemptive runs. Our model characterizes fundamental volatility, asset illiquidity, reliability of credit lines, and debt maturity as determinants of such dynamic runs.

Keywords: Rollover Risk, Debt Crisis, Dynamic Coordination

JEL Classification: G01, G20

Suggested Citation

He, Zhiguo and Xiong, Wei, Dynamic Debt Runs (August 6, 2010). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1358672 or http://dx.doi.org/10.2139/ssrn.1358672

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

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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