Rollover Risk and Credit Risk

48 Pages Posted: 17 Sep 2009 Last revised: 9 Jun 2011

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)

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2011

Abstract

Our model shows that deterioration of debt market liquidity not only leads to an increase in liquidity premium of corporate bonds but also credit risk. The latter effect originates from firms' debt rollover. When liquidity deterioration causes a firm to suffer losses in rolling over its maturing debt, equity holders bear the losses while maturing debt holders get paid in full. This conflict leads the firm to default at a higher fundamental threshold. Our model demonstrates an intricate interaction between liquidity premium and default premium and highlights the role of short-term debt in exacerbating rollover risk.

Keywords: Short-term Debt Crisis, Endogenous Default, Flight to Quality, Liquidity Spillover, Debt Maturity Structure

Suggested Citation

He, Zhiguo and Xiong, Wei, Rollover Risk and Credit Risk (June 7, 2011). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1474101 or http://dx.doi.org/10.2139/ssrn.1474101

Zhiguo He

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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

Wei Xiong (Contact Author)

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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