Rollover risk as market discipline: a two-sided inefficiency

Thomas Eisenbach

No 597, Staff Reports from Federal Reserve Bank of New York

Abstract: Why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises? This paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk. However, if assets are correlated, a two-sided inefficiency arises: Good aggregate states have intermediaries taking excessive risks, while bad aggregate states suffer from costly fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline. In equilibrium, financial intermediaries inefficiently amplify both positive and negative aggregate shocks.

Keywords: global games; fire sales; rollover risk; market discipline (search for similar items in EconPapers)
JEL-codes: C73 D53 G01 G21 G24 G32 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (14)

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Journal Article: Rollover risk as market discipline: A two-sided inefficiency (2017)
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