Optimization of fire sales and borrowing in systemic risk
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Abstract: This paper provides a framework for modeling financial contagion in a network subject to fire sales and price impacts, but allowing for firms to borrow to cover their shortfall as well. We consider both uncollateralized and collateralized loans. The main results of this work are providing sufficient conditions for existence and uniqueness of the clearing solutions (i.e., payments, liquidations, and borrowing); in such a setting any clearing solution is the Nash equilibrium of an aggregation game.
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- The effects of leverage requirements and fire sales on financial contagion via asset liquidation strategies in financial networks
- The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks
- Uniqueness of equilibrium in a payment system with liquidation costs
Cited in
(22)- Financial contagion and asset liquidation strategies
- Strategic fire-sales and price-mediated contagion in the banking system
- A repo model of fire sales with VWAP and LOB pricing mechanisms
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