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Modelling fire sale contagion across banks and non-banks

Fabio Caccioli, Gerardo Ferrara and Amanah Ramadiah

Journal of Financial Stability, 2024, vol. 71, issue C

Abstract: We examine the impact of fire sales on the UK financial system through commonly held assets across different financial sectors. In particular, we model indirect contagion via fire sales across UK banks and non-banks subject to different types of constraints. We find that performing a stress simulation that does not account for common asset holdings across multiple sectors can severely underestimate the fire sale losses in the financial system. In addition, pro-rata liquidation strategy would result in a higher level of fire sale losses in the system as whole, but a waterfall strategy may produce a higher spillover effect for a passive institution (or a passive sector) that chooses not to promptly liquidate any of its assets during distress while other institutions decide to do so.

Keywords: Common asset holdings; Fire sales; Financial contagion; Systemic risk (search for similar items in EconPapers)
JEL-codes: G20 G21 G22 G23 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Modelling fire sale contagion across banks and non-banks (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:71:y:2024:i:c:s1572308924000160

DOI: 10.1016/j.jfs.2024.101231

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