Collateralized networks with two interacting channels of fire sales

Raymond Pang and Luitgard A. M. Veraart

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

Abstract: We develop a model for financial contagion in collateralized networks in which two channels of fire sales interact. We consider a financial market with multiple assets that can be used for both investment purposes and to satisfy collateral requirements. In our model, a fire sale can be triggered both before default, when illiquid assets are sold to satisfy payment obligations, and after default, when collateral of defaulted institutions is sold. We investigate contagion that arises from the overlap in assets used for investment purposes and as collateral. In particular, we illustrate how fire sales triggered prior to default can reduce the effectiveness of collateralization after a default. Our results highlight the importance of using high-quality assets as collateral to improve financial stability.

Keywords: collateral; financial networks; fire sales; systemic risk (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2026-06-30
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Published in SIAM Journal on Financial Mathematics, 30, June, 2026, 17(2), pp. 545 - 564. ISSN: 1945-497X

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