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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.

Suggested Citation

  • Zhiguo He & Wei Xiong, 2009. "Dynamic Debt Runs," NBER Working Papers 15482, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15482
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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