Rollover Risk and Credit Risk

Zhiguo He, Wei Xiong

Research output: Contribution to journalArticle

144 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)391-430
Number of pages40
JournalJournal of Finance
Volume67
Issue number2
DOIs
StatePublished - Apr 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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