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Rollover risk and credit risk under time-varying margin

Author

Listed:
  • Xue-Zhong He
  • Eva Lütkebohmert
  • Yajun Xiao

Abstract

For a firm financed by a mixture of collateralized (short-term) debt and uncollateralized (long-term) debt, we show that fluctuations in margin requirements, reflecting funding liquidity shocks, lead to increasing the firm’s default risk and credit spreads. The severity with which a firm is hit by increasing margin requirements highly depends on both its financing structure and debt maturity structure. Our results imply that an additional premium should be added when evaluating debt in order to account for rollover risks, especially for short-matured bonds. In terms of policy implications, our results strongly indicate that regulators should intervene fast to curtail margins in crisis periods and maintain a reasonably low margin level in order to effectively prevent creditors’ run on debt.

Suggested Citation

  • Xue-Zhong He & Eva Lütkebohmert & Yajun Xiao, 2017. "Rollover risk and credit risk under time-varying margin," Quantitative Finance, Taylor & Francis Journals, vol. 17(3), pages 455-469, March.
  • Handle: RePEc:taf:quantf:v:17:y:2017:i:3:p:455-469
    DOI: 10.1080/14697688.2016.1203071
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    References listed on IDEAS

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    1. repec:eee:phsmap:v:512:y:2018:i:c:p:186-202 is not listed on IDEAS
    2. repec:gam:jjrfmx:v:11:y:2018:i:2:p:24-:d:145854 is not listed on IDEAS

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