publication . Research . 2002

On strategic default and liquidity risk

Tambakis, Demosthenes N;
English
  • Published: 01 Jan 2002
  • Publisher: CFAP, Cambridge Judge Business School, University of Cambridge
  • Country: United Kingdom
Abstract
How does the uncertain provision of external finance affect investment projects' default probability and liquidity risk? In this paper, I study the strategic interaction between many creditors and a single borrower in the context of a two-period investment project requiring external credit. Loans mature in one period but the project requires two periods to complete. The key working assumptions are that creditors are risk-averse and that any uncertainty is common knowledge: information about the fundamentals can be incomplete but not asymmetric. Mixed and perfect Bayesian strategies are used to compute the equilibrium probabilities of default and early liquidatio...
Subjects
free text keywords: strategic default, liquidity risk, project finance, financial regulation, cyclicality
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Research . 2002
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