Optimal Cash Holdings Under Heterogeneous Beliefs

Jarrow, Robert A.; Krishenik, Andrey; Minca, Andreea

doi:10.2139/ssrn.2449972

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2015

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“…In [17], we model the creditors' investment decisions as a controlled game in one period, where the control is the borrower's asset allocation strategy. The borrower chooses optimally its assets and takes into account the equilibrium reached by the creditors, which in turn depends on the creditors' beliefs about the future evolution of these assets.…”

Section: Conclusion and Future Researchmentioning

confidence: 99%

When do creditors with heterogeneous beliefs agree to run?

Krishenik

Minca

Wissel³

2015

Finance Stoch

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This paper explores, in a multiperiod setting, the funding liquidity of a borrower that finances its operations through short-term debt. The short-term debt is provided by a continuum of creditors with heterogeneous beliefs about the prospects of the borrower. In each period, creditors observe the borrower's fundamentals and decide on the amount they invest in its short-term debt. We formalize this problem as a coordination game, and we show that there exists a unique reasonable Nash equilibrium. We show that the borrower is able to refinance if and only if the liquid net worth is above an illiquidity barrier, and we explicitly find this barrier in terms of the distribution of capital and beliefs across creditors.Keywords Liquidity risk · Credit risk · Nash equilibrium · Bank run Mathematics Subject Classification 91A10 · 91A13 · 91A20 · 91A80 · 91B69 · 91B70 JEL Classification C72 · C73 · D53 · D81 · G11 B A. Minca acm299@cornell.edu A. Krishenik

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Section: Conclusion and Future Researchmentioning

confidence: 99%