Solvency Shocks, Liquidity Shocks, and Fire Sales

Johan Hombert
Additional contact information
Johan Hombert: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

Working Papers from HAL

Abstract: This paper offers a welfare analysis of fire sales. I develop an equilibrium model of fire sales due to uninsurable idiosyncratic risk, and I study its welfare properties from a second-best perspective. When idiosyncratic shocks are mainly liquidity shocks, asset prices are too low in the private economy. By contrast, when idiosyncratic shocks are mainly solvency shocks, competitive asset prices are too high. I then design an empirical test to determine where the economy stands. I also extend my model to an open economy and show that fire-sale FDI is associated with a deviation from the second-best, but that imposing capital control would make a bad situation worse.

Keywords: Solvency Shocks; Liquidity Shocks; Fire Sales (search for similar items in EconPapers)
Date: 2012-12-04
References: Add references at CitEc
Citations:

Published in 2012

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:wpaper:hal-00760754

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().