Modelling fire sale contagion across banks and non-banks
Fabio Caccioli (),
Gerardo Ferrara () and
Amanah Ramadiah ()
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Fabio Caccioli: University College London
Amanah Ramadiah: University College London
No 878, Bank of England working papers from Bank of England
We study the impact of common asset holdings across different financial sectors on financial stability. In particular, we model indirect contagion via fire sales across UK banks and non-banks. Fire sales are triggered by different responses to a financial shock: banks and non unit-linked insurers are subject to regulatory constraints, while funds and unit-linked insurers are obliged to meet investor redemptions. We use our model to conduct a systemic stress simulation under different initial shock scenarios and institutions’ selling strategies. 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.
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)
Pages: 43 pages
New Economics Papers: this item is included in nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0878
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