Asset quality, debt maturity, and market liquidity

Yaxian Gong and Xu Wei

Finance Research Letters, 2019, vol. 31, issue C

Abstract: We construct a model that endogenizes both the debt maturity choices of financial institutions and the liquidity of the asset market in a Rational Expectations Equilibrium. And we find that the decrease in asset quality can cause over-reliance on short-term debt and also lower market liquidity at the same time. Our result provides a new mechanism of market freeze and sheds light on unifiedy understanding the maturity mismatch and liquidity dry-ups of the asset market during the recent global financial crisis.

Keywords: Debt maturity; Market discipline; Asset quality; Market liquidity (search for similar items in EconPapers)
JEL-codes: G01 G02 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:31:y:2019:i:c:s1544612318301223

DOI: 10.1016/j.frl.2018.11.015

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