The Maturity Rat Race

38 Pages Posted: 18 Dec 2010  

Markus K. Brunnermeier

Princeton University - Department of Economics

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance; Columbia Business School - Finance and Economics

Date Written: December 2010

Abstract

We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.

Suggested Citation

Brunnermeier, Markus K. and Oehmke, Martin, The Maturity Rat Race (December 2010). NBER Working Paper No. w16607. Available at SSRN: https://ssrn.com/abstract=1727088

Markus Konrad Brunnermeier (Contact Author)

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

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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