Working Paper: NBER ID: w17935
Abstract: We study rollover risk and collateral value in a dynamic asset pricing model with endogenous debt financing by extending the framework of Geanakoplos (2009) with a generic binomial tree and time-varying heterogeneous beliefs. Optimistic borrowers face rollover risk if the belief dispersion between the borrowers and the pessimistic lenders widens after interim bad news. We demonstrate the optimality of the maximum riskless short-term debt financing for optimistic borrowers even in the presence of the rollover risk. We also highlight the role of interim trading which, by allowing creditors to sell seized collateral to other optimists with saved cashes, boosts the asset's collateral value and equilibrium price.
Keywords: debt financing; asset markets; rollover risk; collateral value
JEL Codes: G01; G1; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| belief dispersion (D80) | rollover risk (G11) |
| belief dispersion (D80) | refinancing costs (G32) |
| rollover risk (G11) | debt financing decisions (G32) |
| rollover risk (G11) | optimal strategy for optimistic borrowers (G51) |
| belief dispersion (D80) | collateral value (D46) |
| interim trading (G14) | collateral value (D46) |
| collateral value (D46) | equilibrium price of assets (G19) |
| belief dispersion (D80) | optimality of debt maturity choices (G32) |
| marginal value of cash (E41) | optimists' decisions (D91) |