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Dynamic Debt Runs

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  • Zhiguo He
  • Wei Xiong

Abstract

We develop a dynamic model of debt runs on a firm, which invests in an illiquid asset by rolling over staggered short-term debt contracts. We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the firm's publicly observable and time-varying fundamental. Fear of the firm's future rollover risk motivates each maturing creditor to run ahead of others even when the firm is still solvent. Our model provides implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on firms' capital adequacy standards and credit risk.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15482.

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Date of creation: Nov 2009
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Publication status: published as Dynamic Debt Runs, with Wei Xiong, 2012, Review of Financial Studies 25, pp. 1799-1843.
Handle: RePEc:nbr:nberwo:15482

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Cited by:
  1. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  2. Vives, Xavier, 2011. "Strategic Complementarity, Fragility, and Regulation," CEPR Discussion Papers 8444, C.E.P.R. Discussion Papers.
  3. Chris Bloor & Rebecca Craigie & Anella Munro, 2012. "The macroeconomic effects of a stable funding requirement," Reserve Bank of New Zealand Discussion Paper Series DP2012/05, Reserve Bank of New Zealand.

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