Publication date: December 2019
Source: Finance Research Letters, Volume 31
Author(s): Yaxian Gong, Xu Wei
Abstract
We construct a model that endogenizes both the debt maturity choices of financial institutions and the liquidity of the asset market in a Rational Expectations Equilibrium. And we find that the decrease in asset quality can cause over-reliance on short-term debt and also lower market liquidity at the same time. Our result provides a new mechanism of market freeze and sheds light on unifiedy understanding the maturity mismatch and liquidity dry-ups of the asset market during the recent global financial crisis.