Optimization of Fire Sales and Borrowing in Systemic Risk

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.

Simulating fire sales in a system of banks and asset managers

“…A relatively new stream of literature has looked at fire sales in other ways: to explain and reproduce the fire-sale dynamics as cascade effects (Greenwood et al, 2015;Shleifer and Vishny, 2011) or with complex financial networks (Caballero and Simsek, 2013;Cecchetti et al, 2016), to quantify vulnerability of the system to fire-sale spillovers (Ha laj and Kok, 2013;Duarte and Eisenbach, 2013;Greenwood et al, 2015), to study the role of diversification and asset commonality (Caccioli et al, 2015(Caccioli et al, , 2014Ha laj, 2018;Bichuch and Feinstein, 2019), to assess the role of capital and liquidity regulation, Cifuentes et al (2005); Krahnen (2011, 2014), or to consider the role of a central bank .…”

Fire Sales, Default Cascades and Complex Financial Networks

“…We refer to e.g., [27,30,53] for a more detailed review of the literature on fire sales. Our work complements a number of recent papers that integrate the fire sales loss into the cascades of insolvencies in interbank networks, see e.g., [7,16,20,23,26,34,38,42,50,56]. In particular, [34] uses and extends the methods developed in [5,8] to provide a resilience condition for the financial network in an integrated model of fire sales and default contagion, in the context of inhomogeneous random graphs.…”

Decentralized Payment Clearing using Blockchain and Optimal Bidding

“…This model has been extended in different directions to cover new features. To name just a few, [20,26] introduces bankruptcy costs and mark to market losses, [3,6,11,18] consider the fire sales for a single and multiple illiquid assets.…”