Optimization of fire sales and borrowing in systemic risk

Maxim Bichuch, Zachary Feinstein

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

This paper provides a framework for modeling financial contagion in a network subject to fire sales and price impacts, but allowing for firms to borrow to cover their shortfall as well. We consider both uncollateralized and collateralized loans. The main results of this work are providing sufficient conditions for the existence and uniqueness of the clearing solutions (i.e., payments, liquidations, and borrowing); in such a setting, any clearing solution is the Nash equilibrium of an aggregation game.

Original languageEnglish
Pages (from-to)68-88
Number of pages21
JournalSIAM Journal on Financial Mathematics
Volume10
Issue number1
DOIs
StatePublished - 2019

Keywords

  • Borrowing
  • Financial contagion
  • Fire sales
  • Networks
  • Systemic risk

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