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Fire sale in financial networks | IEEE Conference Publication | IEEE Xplore

Fire sale in financial networks


Abstract:

The default of one bank can cause other banks to default through two channels: financial contagion in the inter-bank liability network and fire sale in the asset selling ...Show More

Abstract:

The default of one bank can cause other banks to default through two channels: financial contagion in the inter-bank liability network and fire sale in the asset selling market. When the defaulted bank cannot fully pay its debt, the loss is transmitted to other banks. When banks rush to sell the same asset simultaneously, they may fall into a Nash equilibrium in which banks compete for liquidity and sell their assets at an artificially low price. In this paper, a model that incorporates these two channels is developed and analyzed theoretically. An algorithm for finding the state in which both the inter-bank liability network and the market are in equilibrium is proposed and tested.
Date of Conference: 19-21 March 2014
Date Added to IEEE Xplore: 12 May 2014
Electronic ISBN:978-1-4799-3001-2
Conference Location: Princeton, NJ, USA

References

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