Dynamic debt runs and financial fragility: Evidence from the 2007 ABCP crisis

Schroth, Enrique; Suárez, Gustavo; Taylor, Lucian A.

doi:10.1016/j.jfineco.2014.01.002

Cited by 77 publications

(33 citation statements)

References 46 publications

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“…This is the extreme case of insufficient cash-in-the-market in Allen and Gale (1994). Borrowers therefore have the liquidity to withstand the run if and only if they have sufficient cash on their own, i.e., iff  0 ≥ 0 for b   = 0 as defined in (31). In this case, the borrower can only rely on the return from maturing securities and neither asset sales nor purchases can occur.…”

Section: Liquiditymentioning

confidence: 99%

The fragility of short-term secured funding markets

Martin

Skeie

Thadden

2014

Journal of Economic Theory

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This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants depend on the borrower's (endogenous) balance sheet and on (exogenous) fundamentals. Systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.

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Section: Liquiditymentioning

confidence: 99%

The fragility of short-term secured funding markets

Martin

Skeie

Thadden

2014

Journal of Economic Theory

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“…(, ) but bears some similarities to Schroth et al . () in which a run is triggered when the short‐term rate hits a given threshold. A main difference to our paper is that we consider a deterministic debt structure with two different types of debt which allows us to determine an optimal short‐to‐long‐term debt ratio whereas Schroth et al .…”

Section: Introductionmentioning

confidence: 99%

Endogenous Credit Spreads and Optimal Debt Financing Structure in the Presence of Liquidity Risk

Lütkebohmert

Oeltz²,

Xiao

2016

Euro Fin Management

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We present a structural model that allows a firm to effectively manage its exposure to both insolvency and illiquidity risk inherent in its financing structure. Besides insolvency risk, the firm is exposed to rollover risk through possible runs by short‐term creditors. Moreover, asset price volatilities are subject to macroeconomic shocks and influence creditors' risk attitudes and margin requirements. Credit spreads are derived endogenously depending on the firm's total default risk. Equity holders have to bear the rollover losses. An optimal debt structure that maximises the firm's equity value is determined by trading off lower financing costs and higher rollover risk.

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“…In these models, firms costlessly replace an exogenous fraction of their debt with newly issued debt at each point in time (see e.g. Leland [40], Leland and Toft [41], Hilberink and Rogers [30], Eom, Helwege, and Huang [16], He and Xiong [32], Cheng and Milbradt [8], or Schroth, Suarez, and Taylor [53]). In a recent contribution, Décamps and Villeneuve [11] show that there exists a unique equilibrium in default barrier strategies in these models when the liquidation value of assets is zero.…”

Section: Introductionmentioning

confidence: 99%