We study a simple model of liquidity risk management in which a firm is subject to rollover risk. When a firm is unable to rollover its maturing bonds by issuing new bonds, it may have to seek more expensive sources of financing or even liquidate its assets, possibly at fire-sale prices. One way to reduce this risk is to hold excess cash reserves, which can be expensive in practice (Bengt Holmström and Jean Tirole 2000; 2001). In this paper, we focus on an alternative way of managing liquidity risk, through the optimal (dynamic) choice of the maturity structure of debt. Our analysis highlights one advantage of short-term financing. The firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value. Ideally, the firm would secure long-term financing just prior to when its financial health may worsen. Through this strategy, the firm can secure financing for the longest continuous period possible without rollover failure, avoiding inefficient restructuring costs. Put differently, the objective of the 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.

During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.

The magnitude of and heterogeneity in systematic earnings risk has important implications for various theories in macro, labor, and financial economics. Using administrative data, we document how the aggregate risk exposure of individual earnings to GDP and stock returns varies across gender, age, the worker's earnings level, and industry. Aggregate risk exposure is U-shaped with respect to the earnings level. In the middle of the earnings distribution, aggregate risk exposure is higher for males, younger workers, and construction and durable manufacturing. At the top of the earnings distribution, aggregate risk exposure is higher for older workers and finance.

We use new and comprehensive data on the security holdings of euro-area investors to document facts about the ongoing quantitative easing program. The holdings of purchase-eligible government bonds have strong home bias not only for banks but also for insurance companies, pension funds, and mutual funds, especially in the vulnerable countries. In response to the program, foreign investors sold most of the purchase-eligible government bonds. Banks also sold purchase-eligible government bonds to a lesser extent, but insurance companies and pension funds bought them. Thus, quantitative easing may have reduced the duration mismatch for these institutions.