Rollover risk and credit risk under time-varying margin

Xue Zhong He, Eva Lütkebohmert, Yajun Xiao*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


For a firm financed by a mixture of collateralized (short-term) debt and uncollateralized (long-term) debt, we show that fluctuations in margin requirements, reflecting funding liquidity shocks, lead to increasing the firm’s default risk and credit spreads. The severity with which a firm is hit by increasing margin requirements highly depends on both its financing structure and debt maturity structure. Our results imply that an additional premium should be added when evaluating debt in order to account for rollover risks, especially for short-matured bonds. In terms of policy implications, our results strongly indicate that regulators should intervene fast to curtail margins in crisis periods and maintain a reasonably low margin level in order to effectively prevent creditors’ run on debt.

Original languageEnglish
Pages (from-to)455-469
Number of pages15
JournalQuantitative Finance
Issue number3
Publication statusPublished - 4 Mar 2017
Externally publishedYes


  • Funding liquidity
  • Margin requirements
  • Rollover risk
  • Structural credit risk models


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