A Note on Liquidity Risk Management

Citation:

Brunnermeier, Markus K, and Motohiro Yogo. “A Note on Liquidity Risk Management”. American Economic Review 99 (2009): , 99, 578-83. Print.

Number:

2

Abstract:

When a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a 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. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.

Notes:

Duration hedging might give the wrong prescription for minimizing rollover risk.

See also: Liquidity
Last updated on 07/16/2014