The Maturity Rat Race

Markus Brunnermeier and Martin Oehmke

No 16607, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.

JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2010-12
Note: AP CF
References: View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Markus K. Brunnermeier & Martin Oehmke, 2013. "The Maturity Rat Race," Journal of Finance, American Finance Association, vol. 68(2), pages 483-521, 04.

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Journal Article: The Maturity Rat Race (2013)
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