Rollover Traps

55 Pages Posted: 7 Mar 2016 Last revised: 6 Dec 2016

See all articles by Marco Della Seta

Marco Della Seta

APG - Asset Management

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Francesca Zucchi

European Central Bank

Date Written: October 25, 2016

Abstract

We model the joint effects of debt maturity and cash holdings on default risk. When firms have short-term debt outstanding, negative cash flow shocks lead to a drop in liquid reserves and may cause firms to suffer losses when rolling over their debt, due to weaker fundamentals. This mechanism gets more pronounced as debt maturity decreases, increases default risk, and can give rise to a rollover trap, a scenario in which firms burn their cash flows and cash reserves due to severe rollover losses. High exposure to rollover risk can also make claimholders risk-loving and lead distressed firms to implement gambling strategies.

Keywords: Short-term debt financing; rollover risk; financial amplification

JEL Classification: G32, G35

Suggested Citation

Della Seta, Marco and Morellec, Erwan and Zucchi, Francesca, Rollover Traps (October 25, 2016). Swiss Finance Institute Research Paper No. 16-19, Available at SSRN: https://ssrn.com/abstract=2742124 or http://dx.doi.org/10.2139/ssrn.2742124

Marco Della Seta

APG - Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS
Netherlands

Erwan Morellec (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Francesca Zucchi

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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