Rollover risk and credit spreads in the financial crisis of 2008

This paper investigates the asset pricing implications of rollover risk, i.e., the risk that firms might not be able to refinance their due liabilities. I find that firm-specific rollover risk coupled with deteriorating credit market conditions significantly increase firms' credit spreads. During the 2008–2009 financial crisis period, the one-year CDS spreads for high rollover risk firms are 32–72 basis points higher than the spreads of low rollover risk firms. Longer maturity CDS spreads show similar patterns with smaller magnitudes. During normal periods, however, CDS spreads are mostly explained by fundamental variables and rollover risk is not a significant determinant. Similar rollover risk effect is also observed in other financial markets, including corporate bond, stock, and options markets.