Dynamic Debt Runs
46 Pages Posted: 13 Mar 2009 Last revised: 11 Nov 2010
Date Written: August 6, 2010
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: Suggested Citation