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A large creditor in contagious liquidity crises

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  • Oh, Frederick Dongchuhl
  • Park, Junghum

Abstract

This paper presents a contagious liquidity crises model for nonfinancial firms in which a large creditor influences the extent to which the contagion spreads across firms. We consider a sequential framework where two rollover games occur one after another. A liquidity crisis in one firm triggers a liquidity crisis in another firm through changes in the risk attitudes of creditors from the wealth effect. We show that the presence of a large creditor with a sufficient asset size reduces the contagion effect. Moreover, a concentration of a large creditor’s loan portfolio towards the former firm increases the contagion effect. (JEL G01, G33, D82, D83).

Suggested Citation

  • Oh, Frederick Dongchuhl & Park, Junghum, 2023. "A large creditor in contagious liquidity crises," Journal of Banking & Finance, Elsevier, vol. 146(C).
    • Handle: RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002862
    DOI: 10.1016/j.jbankfin.2022.106706
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    More about this item

    Keywords

    Contagion; Large creditor; Liquidity crisis; Global game; Wealth effect; Coordination failure;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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