That's how we roll: An experiment on rollover risk

Ciril Bosch-Rosa

No 2014-048, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: There is consensus that the recent financial crisis revolved around a crash of the short-term credit market. Yet there is no agreement around the necessary policies to prevent another credit freeze. In this experiment we test the effects that contract length (i.e. maturity mismatch) has on the market-wide supply of short-term credit. Our main result is that, while credit markets with shorter maturities are less prone to freezes, the optimal policy should be state-dependent, favoring long contracts and lower maturity mismatch when the economy is in good shape, and allowing for short-term contracts when the economy is in a recession. We also report the possibility of credit runs on firms with strong fundamentals, something that cannot be observed in the canonical static models of financial panics. Finally, we show that our experimental design produces rich learning dynamics, with a text-book bubble and crash pattern in the market for short-term credit.

Keywords: Experiment; Financial Crisis; Continuous Time; ABCP (search for similar items in EconPapers)
JEL-codes: C91 C92 G01 G02 G21 (search for similar items in EconPapers)
Date: 2014
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Journal Article: That's how we roll: An experiment on rollover risk (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2014-048

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