Rollover Risk and Credit Risk

  • He Z
  • Xiong W
  • 215

    Readers

    Mendeley users who have this article in their library.
  • 86

    Citations

    Citations of this article.

Abstract

ABSTRACT Our model shows that deterioration in debt market liquidity leads to an increase in not only the liquidity premium of corporate bonds but also credit risk. The latter effect originates from firms' debt rollover. When liquidity deterioration causes a firm to suffer losses in rolling over its maturing debt, equity holders bear the losses while maturing debt holders are paid in full. This conflict leads the firm to default at a higher fundamental threshold. Our model demonstrates an intricate interaction between the liquidity premium and default premium and highlights the role of short-term debt in exacerbating rollover risk.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Authors

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free