Dynamic Debt Runs
Zhiguo Hey Wei Xiongz
August 6, 2010
Abstract
Firms commonly spread out their debt expirations across time to reduce the liquidity risk generated by large quantities of debt expiring at the same time. By doing so, they introduce a dynamic coordination problem. In deciding whether to rollover his debt, each maturing creditor is concerned about the rollover decisions of other creditors whose debt matures during his next contract period. We develop a model with a time-varying …rm fundamental and a staggered debt structure to analyze this problem. We derive a unique threshold equilibrium with fear of a …rm' future rollover risk driving preemptive runs. Our model characs terizes fundamental volatility, asset illiquidity, reliability of credit lines, and debt maturity as determinants of such dynamic runs.
JEL classi…cation: G01, G20 Keywords: Rollover Risk, Debt Crisis, Dynamic Coordination
We thank Viral Acharya, Max Bruche, Markus Brunnermeier, Peter DeMarzo, Doug Diamond, Itay Goldstein, Milton Harris, Christopher House, Patrick Kehoe, Thorsten Koeppl, Arvind Krishnamurthy, Pete Kyle, Guido Lorenzoni, Stephen Morris, Jonathan Parker, Darius Palia, Adriano Rampini, Michael Roberts, Andrew Robinson, David Romer, Alp Simsek, Hyun Song Shin, Andrei Shleifer, Amir Su…, Bilge Yilmaz, and seminar participants at 2010 AEA/AFA Meetings, 2009 Bank of Canada Workshop on the Financial System, 2010 Bank of Portugal Conference on Monetary Economics, Chicago, Columbia, Cornell, DePaul, 2009 FESAMES, Federal Reserve Board, Harvard/MIT, HKMA/BIS, IMF, Kellogg, 2009 Mitsui Finance Symposium at Michigan, 2009 NBER Summer Institute workshops in Monetary Economics and in Capital Markets and the Economy, New York Fed, Philadelphia Fed, Maryland, Minnesota, Notre Dame, Princeton, Texas-Austin, Wharton, Stanford, and 2009 University of Michigan Conference on the Financial Crisis for helpful discussion and comments. y University of Chicago, Booth School of Business. Email: zhiguo.he@chicagobooth.edu. z Princeton University and NBER. Email: wxiong@princeton.edu.

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