Rollover risk as market discipline: A two-sided inefficiency

Thomas Eisenbach

Journal of Financial Economics, 2017, vol. 126, issue 2, 252-269

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: Rollover risk; Market discipline; Fire sales; Global games (search for similar items in EconPapers)
JEL-codes: C73 D53 G01 G21 G24 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Working Paper: Rollover risk as market discipline: a two-sided inefficiency (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:126:y:2017:i:2:p:252-269

DOI: 10.1016/j.jfineco.2017.07.009

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