Strategic fire-sales and price-mediated contagion in the banking system

Yann Braouezec () and Lakshithe Wagalath ()
Additional contact information
Yann Braouezec: IESEG School of Management (LEM-CNRS-UMR 9221)
Lakshithe Wagalath: IESEG School of Management (LEM-CNRS-UMR 9221)

No 2017-ACF-05, Working Papers from IESEG School of Management

Abstract: We consider a price-mediated contagion framework in which each bank, after an exogenous shock, may have to sell assets in order to comply with regulatory constraints. Interaction between banks takes place only through price impact. We characterize the equilibrium of the strategic deleveraging problem and we calibrate our model to publicly-available data, the US banks that were part of the 2015 regulatory stress-tests. We then consider a more sophisticated model in which each bank is exposed to two risky assets (marketable and not marketable) and is only able to sell the marketable asset. We calibrate our model using the six banks with signi˝cant trading operations and we show that, depending on the price impact, the contagion of failures may be signi˝cant. Our results may be used to re˝ne current stress testing frameworks by incorporating potential contagion mechanisms between banks

Keywords: Fire sales; price-mediated contagion; Nash equilibrium with strategic complemen-tarities; CCAR 2015; macro-prudential stress-tests (search for similar items in EconPapers)
Pages: 50 pages
Date: 2017-09, Revised 2018-08
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.ieseg.fr/wp-content/uploads/2018/11/20 ... ec-reviewed08-18.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:f201705

Access Statistics for this paper

More papers in Working Papers from IESEG School of Management Contact information at EDIRC.
Bibliographic data for series maintained by Lies BOUTEN ().