Working Paper: NBER ID: w15482
Abstract: We develop a dynamic model of debt runs on a firm, which invests in an illiquid asset by rolling over staggered short-term debt contracts. We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the firm's publicly observable and time-varying fundamental. Fear of the firm's future rollover risk motivates each maturing creditor to run ahead of others even when the firm is still solvent. Our model provides implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on firms' capital adequacy standards and credit risk.
Keywords: Debt Runs; Financial Institutions; Panic Runs; Credit Risk
JEL Codes: G01; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deteriorating fundamentals (E32) | higher likelihood of runs by creditors (G33) |
| higher fundamental volatilities (G13) | increased exposure of firms to runs (E44) |
| asset illiquidity (G33) | exacerbates the risk of runs (E44) |
| shorter debt maturities (G32) | increased run risk (E44) |