Rollover Risk as the Linkage between Debt Market Liquidity and Credit Risk

Stine Louise Daetz

Student thesis: Master thesis

Abstract

This thesis analyses the linkage between debt market liquidity and rms' credit risk. Following the framework of He and Xiong (2012), a deterioration in debt market liquidity leads not only to an increase in the liquidity premium of the corporates bonds, but also to an increase in its credit risk. The increase in rms credit risk originates from their rollover of debt. Equity holders are exposed to rollover risk because a deterioration in debt market liquidity can make the rm su er losses when rolling over its maturing debt. The rollover risk makes the rm to default at a higher fundamental threshold and a ects thereby the rms credit risk. This thesis investigates a theoretical framework for rollover risk and uses validated models to understand and evaluate presumptions of rms' rollover risk and their e ects. Finally, the thesis provides an empirical analysis of the signi cance of rollover risk as a linkage between debt market liquidity and uses as a new approach rms' credit default swap spreads as the measuring variable. Despite some factors in uencing the overall picture and blurring the models exact conclusions the results indicate a positive and signi cant impact of rollover risk on rms' credit risk.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages142