publication . Research . 2002

On strategic default and liquidity risk

Tambakis, Demosthenes N;
  • Published: 01 Jan 2002
  • Publisher: CFAP, Cambridge Judge Business School, University of Cambridge
  • Country: United Kingdom
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...
free text keywords: strategic default, liquidity risk, project finance, financial regulation, cyclicality
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