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A Multiperiod Bank Run Model for Liquidity Risk

Research output: Contribution to journalArticle

Gechun Liang, Eva Lutkebohmert , Yajun Xiao

Original languageEnglish
Pages (from-to)803-842
Number of pages40
JournalReview of Finance
Issue number2
Publication statusPublished - Apr 2014


  • Review_of_Finance_2013_Liang_rof_rft016.pdf

    Review_of_Finance_2013_Liang_rof_rft016.pdf, 520 KB, application/pdf


    Final published version

    Published by Oxford University Press [on behalf of the European Finance Association].

King's Authors


We present a new dynamic bank run model for liquidity risk where a financial institution finances its risky assets by a mixture of short- and long-term debt. The financial institution is exposed to insolvency risk at any time until maturity and to illiquidity risk at a finite number of rollover dates. We compute both insolvency and illiquidity default probabilities in this multiperiod setting using a structural credit risk model approach. Firesale rates can be determined endogenously as expected debt value over current asset value. Numerical results illustrate the impact of various input parameters on the default probabilities.

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