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Rollover Risk and Credit Risk

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  • Zhiguo He
  • Wei Xiong

Abstract

This paper models a firm's rollover risk generated by conflict of interest between debt and equity holders. When the firm faces losses in rolling over its maturing debt, its equity holders are willing to absorb the losses only if the option value of keeping the firm alive justifies the cost of paying off the maturing debt. Our model shows that both deteriorating market liquidity and shorter debt maturity can exacerbate this externality and cause costly firm bankruptcy at higher fundamental thresholds. Our model provides implications on liquidity-spillover effects, the flight-to-quality phenomenon, and optimal debt maturity structures.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15653.

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Date of creation: Jan 2010
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Publication status: published as Zhiguo He & Wei Xiong, 2012. "Rollover Risk and Credit Risk," Journal of Finance, American Finance Association, vol. 67(2), pages 391-430, 04.
Handle: RePEc:nbr:nberwo:15653

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Cited by:
  1. Arnold, Marc & Wagner, Alexander F. & Westermann, Ramona, 2013. "Growth options, macroeconomic conditions, and the cross section of credit risk," Journal of Financial Economics, Elsevier, vol. 107(2), pages 350-385.
  2. Zhiguo He & Wei Xiong, 2012. "Debt Financing in Asset Markets," American Economic Review, American Economic Association, vol. 102(3), pages 88-94, May.
  3. Schuster, Philipp & Uhrig-Homburg, Marliese, 2012. "The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds," Working Paper Series in Economics 45, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  4. Patricio Valenzuela, 2013. "Rollover risk and corporate bond spreads," Documentos de Trabajo 300, Centro de Economía Aplicada, Universidad de Chile.
  5. Leo de Haan & Jan Willem van den End, 2012. "Bank liquidity, the maturity ladder, and regulation," DNB Working Papers 346, Netherlands Central Bank, Research Department.
  6. Zhiguo He & Wei Xiong, 2010. "Financing Speculative Booms," Levine's Working Paper Archive 661465000000000327, David K. Levine.
  7. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05, University of Cologne, Centre for Financial Research (CFR).
  8. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, vol. 104(6), pages 1486-1517, June.
  9. Gechun Liang & Eva L\"utkebohmert & Wei Wei, 2012. "Funding Liquidity, Debt Tenor Structure, and Creditor's Belief: An Exogenous Dynamic Debt Run Model," Papers 1209.3513, arXiv.org, revised Sep 2013.
  10. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.
  11. Choi, Jaewon & Hackbarth, Dirk & Zechner, Josef, 2013. "Granularity of corporate debt," CFS Working Paper Series 2013/26, Center for Financial Studies (CFS).
  12. Christian Gouriéroux & Jean-Cyprien Heam, 2013. "Funding Liquidity Risk from A Regulatory Perspective," Working Papers 2013-20, Centre de Recherche en Economie et Statistique.
  13. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
  14. Kempf, Alexander & Korn, Olaf & Uhrig-Homburg, Marliese, 2012. "The term structure of illiquidity premia," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1381-1391.
  15. Max Bruche & Anatoli Segura, 2013. "Debt maturity and the liquidity of secondary debt markets," LSE Research Online Documents on Economics 55404, London School of Economics and Political Science, LSE Library.
  16. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05 [rev.], University of Cologne, Centre for Financial Research (CFR).
  17. Douglas W. Diamond & Zhiguo He, 2012. "A Theory of Debt Maturity: The Long and Short of Debt Overhang," NBER Working Papers 18160, National Bureau of Economic Research, Inc.
  18. Peter Christoffersen & Du Du & Redouane Elkamhi, 2013. "Rare Disasters and Credit Market Puzzles," CREATES Research Papers 2013-45, School of Economics and Management, University of Aarhus.
  19. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance 1410, University of St. Gallen, School of Finance.
  20. Imbierowicz, Björn & Rauch, Christian, 2014. "The relationship between liquidity risk and credit risk in banks," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 242-256.

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