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When do creditors with heterogeneous beliefs agree to run?

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  • Andrey Krishenik

    ()

  • Andreea Minca

    ()

  • Johannes Wissel

    ()

Abstract

This paper explores, in a multiperiod setting, the funding liquidity of a borrower that finances its operations through short-term debt. The short-term debt is provided by a continuum of creditors with heterogeneous beliefs about the prospects of the borrower. In each period, creditors observe the borrower’s fundamentals and decide on the amount they invest in its short-term debt. We formalize this problem as a coordination game, and we show that there exists a unique reasonable Nash equilibrium. We show that the borrower is able to refinance if and only if the liquid net worth is above an illiquidity barrier, and we explicitly find this barrier in terms of the distribution of capital and beliefs across creditors. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Andrey Krishenik & Andreea Minca & Johannes Wissel, 2015. "When do creditors with heterogeneous beliefs agree to run?," Finance and Stochastics, Springer, vol. 19(2), pages 233-259, April.
  • Handle: RePEc:spr:finsto:v:19:y:2015:i:2:p:233-259
    DOI: 10.1007/s00780-015-0259-x
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Liquidity risk; Credit risk; Nash equilibrium; Bank run; 91A10; 91A13; 91A20; 91A80; 91B69; 91B70; C72; C73; D53; D81; G11;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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