TY - JOUR
T1 - A repo model of fire sales with VWAP and LOB pricing mechanisms
AU - Bichuch, Maxim
AU - Feinstein, Zachary
N1 - Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2022/1/1
Y1 - 2022/1/1
N2 - We consider a network of banks that optimally choose a strategy of asset liquidations and borrowing in order to cover short term obligations. The borrowing is done in the form of collateralized repurchase agreements, the haircut level of which depends on the total liquidations of all the banks. Similarly the fire-sale price of the asset obtained by each of the banks depends on the amount of assets liquidated by the bank itself and by other banks. By nature of this setup, banks’ behavior is considered as a Nash equilibrium. This paper provides two forms for market clearing to occur: through a common closing price and through an application of the limit order book. The main results of this work are providing the existence of maximal and minimal clearing solutions (i.e., liquidations, borrowing, fire sale prices, and haircut levels) as well as sufficient conditions for uniqueness of the clearing solutions.
AB - We consider a network of banks that optimally choose a strategy of asset liquidations and borrowing in order to cover short term obligations. The borrowing is done in the form of collateralized repurchase agreements, the haircut level of which depends on the total liquidations of all the banks. Similarly the fire-sale price of the asset obtained by each of the banks depends on the amount of assets liquidated by the bank itself and by other banks. By nature of this setup, banks’ behavior is considered as a Nash equilibrium. This paper provides two forms for market clearing to occur: through a common closing price and through an application of the limit order book. The main results of this work are providing the existence of maximal and minimal clearing solutions (i.e., liquidations, borrowing, fire sale prices, and haircut levels) as well as sufficient conditions for uniqueness of the clearing solutions.
KW - Finance
KW - Price-Mediated contagion
KW - Repurchase agreements
KW - Systemic risk
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U2 - 10.1016/j.ejor.2021.04.040
DO - 10.1016/j.ejor.2021.04.040
M3 - Article
AN - SCOPUS:85108543982
SN - 0377-2217
VL - 296
SP - 353
EP - 367
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 1
ER -