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Review of Finance Vol. 18 No. 2 2014

A Multiperiod Bank Run Model for Liquidity Risk

Gechun Liang; Eva Lütkebohmert; Yajun Xiao

1 Oxford-Man Institute and Mathematical Institute, University of Oxford and 2Institute for Research in Economic Evolution, University of Freiburg

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Abstract

We present a new dynamic bank run model for liquidity risk where a financial institution finances its risky assets by a mixture of short- and long-term debt. The financial institution is exposed to insolvency risk at any time until maturity and to illiquidity risk at a finite number of rollover dates. We compute both insolvency and illiquidity default probabilities in this multiperiod setting using a structural credit risk model approach. Firesale rates can be determined endogenously as expected debt value over current asset value. Numerical results illustrate the impact of various input parameters on the default probabilities.

DOI
10.1093/rof/rft016
Volume
18
Issue
2
Pages
803-842
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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