Rollover risk and market freezes

Viral V. Acharya, Douglas Gale, Tanju Yorulmazer

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The debt capacity of an asset is the maximum amount that can be borrowed using the asset as collateral. We model a sudden collapse in the debt capacity of good collateral. We assume short-term debt that must be frequently rolled over, a small transaction cost of selling collateral in the event of default, and a small probability of meeting a buy-to-hold investor. We then show that a small change in the asset's fundamental value can be associated with a catastrophic drop in the debt capacity, the kind of market freeze observed during the crisis of 2007 to 2008.

    Original languageEnglish (US)
    Pages (from-to)1177-1209
    Number of pages33
    JournalJournal of Finance
    Volume66
    Issue number4
    DOIs
    StatePublished - Aug 2011

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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