A Multiperiod Bank Run Model for Liquidity Risk
Gechun Liang (),
Eva Lütkebohmert and
Review of Finance, 2014, vol. 18, issue 2, 803-842
We present a new dynamic bank run model for liquidity risk where a financial institution finances its risky assets by a mixture of short- and long-term debt. The financial institution is exposed to insolvency risk at any time until maturity and to illiquidity risk at a finite number of rollover dates. We compute both insolvency and illiquidity default probabilities in this multiperiod setting using a structural credit risk model approach. Firesale rates can be determined endogenously as expected debt value over current asset value. Numerical results illustrate the impact of various input parameters on the default probabilities.
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Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:18:y:2014:i:2:p:803-842.
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