Spillover Effects between Liquidity Risks through Endogenous Debt Maturity

摘要:

We construct a model of debt maturity structure and show how a firm trades off between the costs of market liquidity risk and rollover risk. On one hand, the issuance of long-term debt reduces market liquidity because it increases the supply in the secondary debt market, which increases the cost the firm bears for long-term debt (i.e., the cost of market liquidity risk). On the other hand, the use of short-term debt increases the likelihood of early liquidation, which raises the cost of short-term debt for the firm (i.e., the cost of rollover risk). We show that market liquidity risk and rollover risk the firm is exposed to are connected through endogenously determined debt maturity structure. An exogenous shock (e.g., shrinkage of market depth or an increase in risk-free interest rate) that directly increases one type of liquidity risk would induce the firm to alter debt maturity structure and partially offset the impact of the shock by raising its exposure to the other type of risk (i.e., spillover effects exist). We also show that the spillover from market liquidity risk (rollover risk) to rollover risk (market liquidity risk) is more (less) pronounced during economic recessions or in the case of competitive firms.

访问链接