Debt Maturity and the Liquidity of Secondary Debt Markets

58 Pages Posted: 2 Apr 2016

See all articles by Max Bruche

Max Bruche

Humboldt University of Berlin

Anatoli Segura

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2016

Abstract

We develop an equilibrium model of the debt maturity choice of firms, in the presence of fixed issuance costs in the primary debt market, and search frictions in the secondary debt market. Liquidity in the secondary market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of sellers in the secondary debt market and hence reduce the interest rate firms need to offer in the primary market. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. We find that the laissez-faire equilibrium exhibits inefficiently short maturity choices because an individual firm does not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms.

Keywords: debt maturity, search, liquidity

JEL Classification: G12, G32

Suggested Citation

Bruche, Max and Segura, Anatoli, Debt Maturity and the Liquidity of Secondary Debt Markets (January 21, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1049. Available at SSRN: https://ssrn.com/abstract=2757613 or http://dx.doi.org/10.2139/ssrn.2757613

Max Bruche

Humboldt University of Berlin ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

HOME PAGE: http://www.maxbruche.net

Anatoli Segura (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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