Assessing and mitigating fire sales risk under partial information

Raymond Ka-Kay Pang and Luitgard Anna Maria Veraart

Journal of Banking & Finance, 2023, vol. 155, issue C

Abstract: We consider the problem of assessing and mitigating fire sales risk for banks under partial information. Using data from the European Banking Authority's stress tests, we consider the matrix of asset holdings of different banks. We first analyse fire sales risk under both full and partial information using different matrix reconstruction methods. We then investigate how well some policy interventions aimed at mitigating fire sales risk perform if they are applied based on only partial information. We find that even under partial information, using suitable network reconstruction methods to decide on policy interventions can significantly mitigate risk from fire sales. Furthermore, we show that some interventions based on reconstructed networks significantly outperform ad hoc methods that decide on interventions only based on the size of an institution and do not account for overlapping portfolios.

Keywords: Systemic risk; Fire sales; Stress testing; Financial networks; Matrix reconstruction; Policy interventions (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:155:y:2023:i:c:s0378426623001875

DOI: 10.1016/j.jbankfin.2023.106989

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