SAFE Brown Bag Seminar: Daniel Streitz (IWH and University of Jena)

Jointly organized with the SAFE Visitors Program

12 Jul 2023 11:30 AM
12 Jul 2023 12:30 PM

The Leibniz Institute SAFE organizes a brown bag seminar by

Daniel Streitz (IWH and University of Jena)

The Art of Timing: Managing Sudden Stop Risk in Corporate Credit Markets (with Lin Ma and Fabrice Tourre)

Abstract: High yield firms aggressively exercise the call option embedded in their bonds. We construct a new measure of option moneyness and show that firms efficiently exercise the interest rate and spread option implicit in these contracts. Controlling for moneyness, firms frequently prepay bonds and issue new debt if rollover risk is high. We develop and estimate a structural model to quantify the costs and benefits of dynamically managing this risk. The ability to use callable debt almost entirely dissipates dead-weight losses from rollover risk. Creditor-shareholder conflicts reduce the effectiveness of this dynamic hedging strategy for highly levered firms.