Abstract

http://ssrn.com/abstract=1633042
 
 

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Crises, Liquidity Shocks, and Fire Sales at Financial Institutions


Nicole M. Boyson


Northeastern University - D’Amore-McKim School of Business

Jean Helwege


University of South Carolina

Jan Jindra


U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

July 22, 2011


Abstract:     
We investigate liquidity shocks and shocks to fundamentals during financial crises at commercial banks, investment banks, and hedge funds. Liquidity shock amplification models assume that widespread funding problems cause fire sales. We find that most banks do not experience funding declines during crises. Banks that do face debt shortages circumvent fire sales by shifting to deposits, issuing equity, and cherry picking. Similarly, we find that hedge funds facing large redemption requests often sell more stock than necessary and use excess proceeds to buy new stock. We conclude that shocks to fundamentals, not illiquidity-induced fire sales, are central to financial crises.

Number of Pages in PDF File: 56

Keywords: Liquidity shocks, funding shocks, fire sales, financial crisis, banks, investment banks, hedge funds, financial constraints

JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61

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Date posted: July 2, 2010 ; Last revised: May 18, 2014

Suggested Citation

Boyson, Nicole M. and Helwege, Jean and Jindra, Jan, Crises, Liquidity Shocks, and Fire Sales at Financial Institutions (July 22, 2011). Available at SSRN: http://ssrn.com/abstract=1633042 or http://dx.doi.org/10.2139/ssrn.1633042

Contact Information

Nicole M. Boyson
Northeastern University - D’Amore-McKim School of Business ( email )
360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)
Jean Helwege (Contact Author)
University of South Carolina ( email )
Columbia, SC 29208
United States
Jan Jindra
U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )
44 Montgomery Street
San Francisco, CA 94104
United States
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