Rollover Risk and Market Freezes
Douglas Gale (),
Viral Acharya and
Tanju Yorulmazer
No 7122, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Abstract:
We consider the debt capacity of a risky asset when debt is being rolled over and there is a liquidation cost in case of default. We show that debt capacity depends on how information about the quality of the asset is revealed. When the information structure is based on ?optimistic? expectations, the arrival of no news about the asset is good news; under this structure, debt capacity does not depend upon rollovers and liquidation cost, and is simply equal to expected cash flows from the asset. In contrast, when the information structure is based on ?pessimistic? expectations, no news about the asset is bad news; under this structure, debt capacity of the asset is decreasing in the liquidation cost and frequency of rollovers. In the limit, as the number of rollovers becomes unbounded, the debt capacity goes to zero even for an arbitrarily small default risk. Our model explains why markets for rollover debt, such as asset-backed commercial paper, may experience sudden freezes. The model also provides an explicit formula for the haircut in secured borrowing or repo transactions.
Keywords: Asset-backed commercial paper; Credit risk; Haircut; Liquidation cost; Repo; Secured borrowing (search for similar items in EconPapers)
JEL-codes: D8 G12 G21 G24 G32 G33 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (62)
Downloads: (external link)
https://cepr.org/publications/DP7122 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
Related works:
Journal Article: Rollover Risk and Market Freezes (2011)
Working Paper: Rollover Risk and Market Freezes (2010) 
Working Paper: Rollover Risk and Market Freezes (2010) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7122
Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7122
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().