long time. -- liquidity trap ; financial crisis ; rare disasters ; equity capital ; leverage ; bankruptcy risk …This paper explains the emergence of liquidity traps in the aftermath of large-scale financial crises, as happened in … equity capital to the risk-free interest rate. When equity capital falls, bankruptcy risks rise. Firms become more vulnerable …

. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly … renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation …