TY - JOUR
T1 - The effects of leverage requirements and fire sales on financial contagion via asset liquidation strategies in financial networks
AU - Feinstein, Zachary
AU - El-Masri, Fatena
N1 - Publisher Copyright:
© 2017 Walter de Gruyter GmbH, Berlin/Boston 2017.
PY - 2017/9/1
Y1 - 2017/9/1
N2 - This paper provides a framework for modeling the financial system with multiple illiquid assets when liquidation of illiquid assets is caused by failure to meet a leverage requirement. This extends the network model of [6] which incorporates a single asset with fire sales and capital adequacy ratio. This also extends the network model of [14] which incorporates multiple illiquid assets with fire sales and no leverage ratios. We prove existence of equilibrium clearing payments and liquidation prices for a known liquidation strategy when leverage requirements are required. We also prove sufficient conditions for the existence of an equilibrium liquidation strategy with corresponding clearing payments and liquidation prices. Finally, we calibrate network models to asset and liability data for 50 banks in the United States from 2007-2014 in order to draw conclusions on systemic risk as a function of leverage requirements.
AB - This paper provides a framework for modeling the financial system with multiple illiquid assets when liquidation of illiquid assets is caused by failure to meet a leverage requirement. This extends the network model of [6] which incorporates a single asset with fire sales and capital adequacy ratio. This also extends the network model of [14] which incorporates multiple illiquid assets with fire sales and no leverage ratios. We prove existence of equilibrium clearing payments and liquidation prices for a known liquidation strategy when leverage requirements are required. We also prove sufficient conditions for the existence of an equilibrium liquidation strategy with corresponding clearing payments and liquidation prices. Finally, we calibrate network models to asset and liability data for 50 banks in the United States from 2007-2014 in order to draw conclusions on systemic risk as a function of leverage requirements.
KW - Systemic risk
KW - financial contagion
KW - financial network
KW - fire sales
KW - leverage requirements
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U2 - 10.1515/strm-2015-0030
DO - 10.1515/strm-2015-0030
M3 - Article
AN - SCOPUS:85028800535
SN - 2193-1402
VL - 34
SP - 113
EP - 139
JO - Statistics and Risk Modeling
JF - Statistics and Risk Modeling
IS - 3-4
ER -