Assessing and mitigating fire sales risk under partial information

Raymond Ka-Kay Pang and Luitgard A. M. Veraart

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; PhD Studentship (search for similar items in EconPapers)
JEL-codes: G20 G28 G32 G33 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-10-01
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Banking and Finance, 1, October, 2023, 155. ISSN: 0378-4266

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120171

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