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Asset quality, debt maturity, and market liquidity

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  • Gong, Yaxian
  • Wei, Xu

Abstract

We construct a model that endogenizes both the debt maturity choices of financial institutions and the liquidity of the asset market in a Rational Expectations Equilibrium. And we find that the decrease in asset quality can cause over-reliance on short-term debt and also lower market liquidity at the same time. Our result provides a new mechanism of market freeze and sheds light on unifiedy understanding the maturity mismatch and liquidity dry-ups of the asset market during the recent global financial crisis.

Suggested Citation

  • Gong, Yaxian & Wei, Xu, 2019. "Asset quality, debt maturity, and market liquidity," Finance Research Letters, Elsevier, vol. 31(C).
    • Handle: RePEc:eee:finlet:v:31:y:2019:i:c:s1544612318301223
    DOI: 10.1016/j.frl.2018.11.015
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    References listed on IDEAS

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    Cited by:

    1. Xiuli Liu & Jing Cui & Yanrui Wu & Xiaohang Yue & Jun Shen & Pibin Guo, 2024. "The Nexus between Green Finance and Carbon Emissions: Evidence from Maturity Mismatch in China," Sustainability, MDPI, vol. 16(10), pages 1-24, May.
    2. Sun, Tingting & Mirza, Nawazish & Umar, Muhammad & Ktaish, Farah, 2024. "When interest rates rise, ESG is still relevant – The case of banking firms," Finance Research Letters, Elsevier, vol. 69(PB).

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    More about this item

    Keywords

    Debt maturity; Market discipline; Asset quality; Market liquidity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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