Abstract
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 liquidity risk as its short-term creditors have the possibility not to renew their funding at a finite number of rollover dates. Besides, the financial institution can default due to insolvency at any time until maturity. We compute both insolvency and illiquidity default probabilities in this multi-period 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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