Spillover effects between liquidity risks through endogenous debt maturity

We construct a model of debt maturity structure and show how a firm trades off between the costs of market liquidity risk and rollover risk. We show that an exogenous shock that directly increases one type of liquidity risk would induce the firm to alter its debt maturity structure and partially offset the impact of the shock by raising its exposure to the other type of risk (i.e., spillover effects exist). We also show that the spillover from market liquidity risk (rollover risk) to rollover risk (market liquidity risk) is more (less) pronounced during recessions or in competitive markets.