Suffocating Fire Sales

DOI10.1137/20M1379800MaRDI QIDQ5029933zbMATH OpenOpenAlexFDO

Authors Nils Detering, Thilo Meyer-Brandis, Daniel Ritter, Konstantinos Panagiotou

Publication date 15 February 2022

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2006.08110

zbMATH Keywords

systemic riskfire saleslarge financial systems

Mathematics Subject Classification ID

Financial networks (including contagion, systemic risk, regulation) (91G45)

Abstract: Fire sales are among the major drivers of market instability in modern financial systems. Due to iterated distressed selling and the associated price impact, initial shocks to some institutions can be amplified dramatically through the network induced by portfolio overlaps. In this paper, we develop a mathematical framework that allows us to investigate central characteristics that drive or hinder the propagation of distress. We investigate single systems as well as ensembles of systems that are alike, where similarity is measured in terms of the empirical distribution of all defining properties of a system. This asymptotic approach ensures a great deal of robustness to statistical uncertainty and temporal fluctuations. A characterization of those systems that are resilient to small shocks emerges, and we provide criteria that regulators might exploit in order to assess the stability of a financial system. We illustrate the application of these criteria for some exemplary configurations in the context of capital requirements and test the applicability of our results for systems of moderate size by Monte Carlo simulations.

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Cites work

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Cited in

(8)

• Analysis of Bank Leverage via Dynamical Systems and Deep Neural Networks
• An integrated model for fire sales and default contagion
• Market efficient portfolios in a systemic economy
• Pricing of debt and equity in a financial network with comonotonic endowments
• Fire sales forensics: measuring endogenous risk
• Netting and novation in repo networks
• Assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction
• Lost in contagion? Building a liquidation index from covariance dynamics

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