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36
A Theory of Debt Maturity: The Long and Short of Debt Overhang
, 2010
"... Maturing short-term debt can impose stronger overhang effect than longterm debt does in distorting the firm’s investment and default decisions when the firm refinances its short-term debt in bad times. We derive the optimal maturity structure based on the trade-off between long-term overhang in good ..."
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Cited by 16 (2 self)
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Maturing short-term debt can impose stronger overhang effect than longterm debt does in distorting the firm’s investment and default decisions when the firm refinances its short-term debt in bad times. We derive the optimal maturity structure based on the trade-off between long-term overhang in good times and short-term overhang in bad times. The theory has implications on empirical studies of debt maturity structure, understanding the excessive defaults and underinvestment during recessions, market-based pricing of credit lines, and firm’s cash holdings.
Dynamic debt runs and financial fragility: evidence from the 2007 ABCP crisis, Working Paper
, 2012
"... We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the ..."
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Cited by 10 (1 self)
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We use the 2007 asset-backed commercial paper (ABCP) crisis as a laboratory to study the determinants of debt runs. Our model features dilution risk: maturing short-term lenders demand higher yields in compensation for being diluted by future lenders, making runs more likely. The model explains the observed ten-fold increase in yield spreads leading to runs and the positive relation between yield spreads and future runs. Results from structural estimation show that runs are very sensitive to leverage, asset values, and asset liquidity, but less sensitive to the degree of maturity mismatch, the strength of guarantees, and asset volatility. Allowing
Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle ∗
, 2013
"... Preliminary and please do not cite This paper introduces time-varying liquidity frictions into a structural model of corporate bond pricing. We feature a combination of procyclical liquidity conditions and countercyclical macroeconomic fundamentals in characterizing the risks of corporate bonds over ..."
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Cited by 2 (1 self)
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Preliminary and please do not cite This paper introduces time-varying liquidity frictions into a structural model of corporate bond pricing. We feature a combination of procyclical liquidity conditions and countercyclical macroeconomic fundamentals in characterizing the risks of corporate bonds over the business cycle. When calibrated to the historical moments of default probabilities and empirical measures of secondary market liquidity, our model matches the observed credit spreads of corporate bonds across high-grade to high-yield ratings, as well as measures of non-default components including Bond-CDS spreads and bid-ask spreads. In addition, we propose a novel structural decomposition scheme that captures the interaction between liquidity frictions and corporate default decisions via the rollover channel. We use this framework to quantitatively evaluate the effects of liquidity-provision policies during crisis time. Our structural approach identifies important economic forces that were previously overlooked by empirical researches in corporate bonds.
Granularity of Corporate Debt∗
, 2014
"... We study the dispersion of debt maturities across time, which we call “granularity of corporate debt, ” using a model in which a firm’s inability to roll over expiring debt causes inefficiencies, such as costly asset sales or underinvestment. Since multiple small asset sales are less costly than a s ..."
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Cited by 1 (0 self)
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We study the dispersion of debt maturities across time, which we call “granularity of corporate debt, ” using a model in which a firm’s inability to roll over expiring debt causes inefficiencies, such as costly asset sales or underinvestment. Since multiple small asset sales are less costly than a single large one, firms diversify debt rollovers across maturity dates. We construct granularity measures using data on corporate bond issuers for the 1991–2012 period and establish a number of novel findings. First, there is substantial variation in granularity in that we observe both very concentrated and highly dispersed maturity structures. Second, observed variation in granularity supports the model’s predictions, i.e., maturities are more dispersed for larger and more mature firms, for firms with better investment opportunities, with higher leverage ratios, and with lower levels of current cash flows. Third, firms manage granularity actively and adjust toward target
Optimal Control of Interbank Contagion under Complete Information
"... We study a preferred equity infusion government program set to mitigate inter-bank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to the risk of bank runs. The government seeks to maximize, under budget constraints, the total net wo ..."
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Cited by 1 (1 self)
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We study a preferred equity infusion government program set to mitigate inter-bank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to the risk of bank runs. The government seeks to maximize, under budget constraints, the total net worth of the financial system or, equivalently, to minimize the dead-weight losses induced by bank runs. The government is assumed to have complete information on interbank debt. The problem of quantifying the optimal amount of infusions can be expressed as a convex combinatorial optimiza-tion problem, tractable when the set of banks eligible for intervention (core banks) is sufficiently, yet realistically, small. We find that no bank has an incentive to withdraw from the program, when the preferred dividend rate paid to the government is equal to the government’s outside return on the intervention budget. On the other hand, it may be optimal for the government to make infusions in a strict subset of core banks.
Date: Approved:
, 2014
"... In this dissertation I study the role of limited commitment in dynamic models. In the first part, I consider firms that face uncertainty shocks in a principal-agent setting but have only limited ability to commit to long-term contracts. Limited commitment firms expedite payments to their managers wh ..."
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In this dissertation I study the role of limited commitment in dynamic models. In the first part, I consider firms that face uncertainty shocks in a principal-agent setting but have only limited ability to commit to long-term contracts. Limited commitment firms expedite payments to their managers when uncertainty is high, a finding that helps to explain the puzzling large bonuses observed during the recent financial crisis. In the second part, I examine a dynamic investment model where firms invest in a risky asset but cannot hedge the risk of their investment because they lack the ability to commit to future repayments of debt. Once firms have access to exogenous supplies of risk free assets, they may on an aggregate level invest more in the risky asset, because risk free technology allows them to increase in wealth in equilibrium. This result helps to explain the asset price booms in emerging countries when they experience substantial capital outflow. iv
Credit market frictions and capital structure dynamics∗
, 2014
"... We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have to se ..."
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We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have to search for investors when seeking to adjust their capital structure. We provide a general analysis of shareholders ’ dynamic financing and default decisions, show when Markov perfect equilibria in financing and default barrier strategies exist, and when uniqueness can be achieved. We then use the model to generate a number of novel testable implications relating credit market frictions to target leverage, the pace and size of capital structure changes, creditor turnover, and the likelihood of default.
Factors Affecting the Solvency of Commercial Banks of Bangladesh: An Empirical Evidence
"... Abstract: This paper aims at identifying the contributing factors to the solvency condition of selected commercial banks of Bangladesh and to propose a model that can be utilized to identify insolvency of the banks. The assumption behind the study entails that a bank may fail due to insolvency and ..."
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Abstract: This paper aims at identifying the contributing factors to the solvency condition of selected commercial banks of Bangladesh and to propose a model that can be utilized to identify insolvency of the banks. The assumption behind the study entails that a bank may fail due to insolvency and there are factors with both systematic and idiosyncratic contents to influence the condition. The study further focuses on discovering significance of those contributing factors to the solvency of commercial banks of Bangladesh so that the model can be better utilized. The study used data of selected Bangladeshi commercial banks listed in Dhaka Stock Exchange and some macroeconomic data during the period of 2004-11.The data were analyzed using panel data regression method under both fixed effect and random effect frameworks. The study further conducts Hausman test, Wooldridge test, and Heterokedasticity test to validate the regressions models. The paper utilizes an insolvency ratio as a proxy of the solvency condition of the banks. The results show that the market valuation component, the ratio of income from securities to effective capital and the interaction term between Texas ratio and unemployment rate have significant impact on the insolvency ratio. Although serious liquidity problems theoretically can cause an otherwise solvent bank to fail under certain conditions, however, the findings of the study indicate that liquidity does not significantly affect the solvency condition of Bangladeshi commercial banks.
RECOMMENDED FOR ACCEPTANCE
, 2012
"... This thesis is a collection of essays on financial liquidity and risk. The first two es-says investigate the liquidity, liquidity premia, and liquidity risk premia of corporate bonds. The third essay examines the risk exposures of hedge fund strategies. The first two essays are single-authored, whil ..."
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This thesis is a collection of essays on financial liquidity and risk. The first two es-says investigate the liquidity, liquidity premia, and liquidity risk premia of corporate bonds. The third essay examines the risk exposures of hedge fund strategies. The first two essays are single-authored, while the third is coauthored with William Kinlaw, John Papp, and David Turkington. The first essay examines the liquidity and liquidity risk premia of investment-grade corporate bonds. I build on standard continuous-time structural credit models by incor-porating an illiquid secondary market for bonds and by allowing this illiquidity to co-vary with Markov risk regimes. Then, using TRACE corporate bond transaction data from 2003 to 2011, two alternative measures of illiquidity, and consumption-liquidity regimes inferred from the data, I show that liquidity and liquidity risk have significant explanatory power in bond yield spreads, both in a reduced-form regression analysis, and in a structural model-calibration analysis. This effect is present both within and across bond rating classes, and is substantially stronger in the period following the 2007-2009
What drives global credit risk conditions? Inference on world, regional, and industry factors * What drives global credit risk conditions? Inference on world, regional, and industry factors
"... Abstract This paper investigates the common dynamic properties of systematic default risk conditions across countries, regions, and the world. We use a high-dimensional nonlinear non-Gaussian state space model to estimate common components in firm defaults in a 22-country sample covering six broad ..."
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Abstract This paper investigates the common dynamic properties of systematic default risk conditions across countries, regions, and the world. We use a high-dimensional nonlinear non-Gaussian state space model to estimate common components in firm defaults in a 22-country sample covering six broad industry sectors and four economic regions in the world. The results indicate that common world factors are a first order source of default risk volatility and default clustering, and that shared exposure to world factors limit the scope of cross-border credit risk diversification for global lenders. Deviations of credit risk conditions from macro fundamentals are correlated with bank lending standards in all regions, suggesting that credit supply and systematic default risk conditions are inversely related. Contrary to intuition, we demonstrate that crossborder credit risk diversification can increase portfolio risk.