Dynamic Debt Runs

We develop a dynamic model of debt runs on a \u85rm, which invests in an illiquid asset by rolling over staggered short-term debt contracts (i.e., di¤erent contracts mature at di¤erent times.) We derive a unique threshold equilibrium, in which creditors coordinate their asynchronous rollover decisions based on the \u85rms publicly observable and time-varying fundamental. The coordination problem ampli es the creditorsconcerns about the \u85rms future rollover risk created by its time-varying fundamental, and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability. Our model provides a set of implications on the roles played by volatility, illiquidity and debt maturity in driving debt runs, as well as on \u85rmscapital adequacy standards and credit risk