Rollover Risk and Credit Spreads in the Financial Crisis of 2008

This paper is an empirical investigation of the asset pricing implication of rollover risk, the risk that a firm might not be able to refinance its due liabilities. I focus on the long-term debt rollover risk and use the proportion of long-term debt falling due within the year to measure a firm’s exposure to rollover risk. I find that firm-specific rollover risk coupled with deteriorating market wide credit conditions indeed increase a firm’s credit spreads. During the peak period of the financial crisis, namely the second half of 2008, one-year CDS spreads for a firm that needs to refinance more than 20% of its long-term debt are 72 basis points higher than the spreads for a similar firm with low refinancing needs. The differences are smaller, around 32 basis points, but still significant at the early and final stages of the financial crisis. Compared to oneyear CDS spreads, CDS spreads for longer maturities are also sensitive to rollover risk information but at lower magnitudes throughout the financial crisis. During normal periods, CDS spreads are mostly explained by fundamental risk while rollover risk is not a significant determinant of credit spreads. Similar rollover risk effect is also observed in other financial markets, including the corporate bond, stock and option