IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdps/062012.html
   My bibliography  Save this paper

Maturity shortening and market failure

Author

Listed:
  • Thierfelder, Felix

Abstract

Motivated by the financial crisis of 2007-2009 several papers have provided explanations for why liquidity may dry up during market stress. This paper also looks at this issue but focuses on the question as to why the liquidity crunch was not uniform across maturities. As funding pressures were felt particularly severe at longer maturities, central banks saw a high need to provide longer-term liquidity. The paper asks what market failure central banks were addressing by intervening and whether they took on unwarranted credit risk by providing other than ultra-short liquidity. I propose a model in which financial firms' expectations about the availability of longer-term liquidity in the future may affect their investment decisions today, even though they have full access to borrowing at the onset. These investment decisions may in turn impact on the willingness of lenders to provide future long-term liquidity. Central banks, by promising to provide long-term liquidity, can rule out the inefficient rational-expectations equilibrium in which firms choose short-term projects or prefund a future potential liquidity need out of fear of not being able to receive long-term funding in the future. The model shows that firms of high credit quality may be particularly prone to choosing inefficient investment decisions for this very reason.

Suggested Citation

  • Thierfelder, Felix, 2012. "Maturity shortening and market failure," Discussion Papers 06/2012, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:062012
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/56019/1/688561365.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2011. "Rollover Risk and Market Freezes," Journal of Finance, American Finance Association, vol. 66(4), pages 1177-1209, August.
    2. Frederic Malherbe, 2014. "Self-Fulfilling Liquidity Dry-Ups," Journal of Finance, American Finance Association, vol. 69(2), pages 947-970, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Liquidity; Asymmetric Information; Debt maturity;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdps:062012. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/dbbgvde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.