Crises, Liquidity Shocks, and Fire Sales at Financial Institutions

56 Pages Posted: 2 Jul 2010 Last revised: 18 May 2014

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

Date Written: 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.

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

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: https://ssrn.com/abstract=1633042 or http://dx.doi.org/10.2139/ssrn.1633042

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 )

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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