  We propose a unified structural credit risk model incorporating both
insolvency and illiquidity risks, in order to investigate how a firm's default
probability depends on the liquidity risk associated with its financing
structure. We assume the firm finances its risky assets by mainly issuing
short- and long-term debt. Short-term debt can have either a discrete or a more
realistic staggered tenor structure. At rollover dates of short-term debt,
creditors face a dynamic coordination problem. We show that a unique threshold
strategy (i.e., a debt run barrier) exists for short-term creditors to decide
when to withdraw their funding, and this strategy is closely related to the
solution of a non-standard optimal stopping time problem with control
constraints. We decompose the total credit risk into an insolvency component
and an illiquidity component based on such an endogenous debt run barrier
together with an exogenous insolvency barrier.
