A Note on Liquidity Risk Management
When a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.
For comments and discussions, we thank Patrick Cheridito, Nicolae Gârleanu, Leonid Kogan, Arvind Krishnamurthy, Guido Lorenzoni, Martin Oehmke, Lasse Pederesen, Martin Schmalz, Hyun Shin, Wei Xiong, and participants of the AEA session on "Liquidity, Macroeconomics, and Asset Prices". The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Markus K. Brunnermeier & Motohiro Yogo, 2009. "A Note on Liquidity Risk Management," American Economic Review, American Economic Association, vol. 99(2), pages 578-83, May. citation courtesy of