Fire sale in financial networks

Haoshu Tian, Weinan E

Research output: Contribution to conferencePaperpeer-review

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.

Original languageEnglish (US)
DOIs
StatePublished - Jan 1 2014
Event2014 48th Annual Conference on Information Sciences and Systems, CISS 2014 - Princeton, NJ, United States
Duration: Mar 19 2014Mar 21 2014

Other

Other2014 48th Annual Conference on Information Sciences and Systems, CISS 2014
CountryUnited States
CityPrinceton, NJ
Period3/19/143/21/14

All Science Journal Classification (ASJC) codes

  • Information Systems

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