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Journal of Finance Vol. 66 No. 4 2011

Rollover Risk and Market Freezes

Viral V. Acharya; Douglas Gale; Tanju Yorulmazer1,2,3

1 Center for Economic and Policy Research · 2 Federal Reserve Bank of New York · 3 New York University

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.

DOI
10.1111/j.1540-6261.2011.01669.x
Volume
66
Issue
4
Pages
1177-1209
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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