We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier … liquid assets. When risk-sharing is primitive, agents selfhedge and hold more liquid assets; this buffers aggregate risks …, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a …

substitute between saving cash for financial hedging to mitigate financial default risk, and spending on operational hedging to … mitigate operational default risk. Whereas financial hedging increases in financial leverage, operational hedging declines in … credit risk, which is stronger for firms facing financing constraints. We present empirical evidence supporting the …

"We argue that a firm's aggregate risk is a key determinant of whether it manages its future liquidity needs through …, firms with high aggregate risk find it costly to get credit lines from banks and opt for cash reserves in spite of higher … robust to variation in the proxies for firms' exposure to aggregate risk and availability of credit lines; works at the firm …