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

Yann Braouezec and Lakshithe Wagalath ()
Additional contact information
Yann Braouezec: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Lakshithe Wagalath: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique

Post-Print from HAL

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 significant trading operations and we show that, depending on the price impact, the contagion of failures may be significant. Our results may be used to refine current stress testing frameworks by incorporating potential contagion mechanisms between banks.

Keywords: Finance; Price-mediated; contagion; Nash; equilibrium; with; strategic; Complementarities; CCAR; 2015; Macro-prudential; stress-tests (search for similar items in EconPapers)
Date: 2019-05
References: Add references at CitEc
Citations: View citations in EconPapers (25)

Published in European Journal of Operational Research, 2019, 274 (3), pp.1180-1197. ⟨10.1016/j.ejor.2018.11.012⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-02107567

DOI: 10.1016/j.ejor.2018.11.012

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().