FIRE SALES FORENSICS: MEASURING ENDOGENOUS RISK

Rama Cont and Lakshithe Wagalath ()
Additional contact information
Rama Cont: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - 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 propose a tractable framework for quantifying the impact of loss‐triggered fire sales on portfolio risk, in a multi‐asset setting. We derive analytical expressions for the impact of fire sales on the realized volatility and correlations of asset returns in a fire sales scenario and show that our results provide a quantitative explanation for the spikes in volatility and correlations observed during such deleveraging episodes. These results are then used to develop an econometric framework for the forensic analysis of fire sales episodes, using observations of market prices. We give conditions for the identifiability of model parameters from time series of asset prices, propose a statistical test for the presence of fire sales, and an estimator for the magnitude of fire sales in each asset class. Pathwise consistency and large sample properties of the estimator are studied in the high‐frequency asymptotic regime. We illustrate our methodology by applying it to the forensic analysis of two recent deleveraging episodes: the Quant Crash of August 2007 and the Great Deleveraging following the default of Lehman Brothers in Fall 2008.

Date: 2016-10
References: Add references at CitEc
Citations: View citations in EconPapers (23)

Published in Mathematical Finance, 2016, 26 (4), pp.835-866. ⟨10.1111/mafi.12071⟩

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-03003955

DOI: 10.1111/mafi.12071

Access Statistics for this paper

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