Debt maturity and the liquidity of secondary debt markets

Max Bruche and Anatoli Segura

No 1049, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We develop an equilibrium model of the debt maturity choice of firms, in the presence of fixed issuance costs in the primary debt market, and search frictions in the secondary debt market. Liquidity in the secondary market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of sellers in the secondary debt market and hence reduce the interest rate firms need to offer in the primary market. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. We find that the laissez-faire equilibrium exhibits inefficiently short maturity choices because an individual firm does not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms.

Keywords: debt maturity; search; liquidity (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Debt maturity and the liquidity of secondary debt markets (2017)
Working Paper: Debt Maturity and the Liquidity of Secondary Debt Markets (2013)
Working Paper: Debt maturity and the liquidity of secondary debt markets (2013)
Working Paper: Debt Maturity and the Liquidity of Secondary Debt Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1049_16

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