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The Maturity Rat Race

  • Markus K. Brunnermeier
  • Martin Oehmke

We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16607.

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Date of creation: Dec 2010
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Publication status: published as Markus K. Brunnermeier & Martin Oehmke, 2013. "The Maturity Rat Race," Journal of Finance, American Finance Association, vol. 68(2), pages 483-521, 04.
Handle: RePEc:nbr:nberwo:16607
Note: AP CF
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