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Were There Fire Sales in the RMBS Market?

Charles A. Dice Center Working Paper No. 2014-09

Fisher College of Business Working Paper No. 2014-03-09

58 Pages Posted: 15 May 2014  

Craig B. Merrill

Brigham Young University; Wharton Financial Institutions Center

Taylor Nadauld

Brigham Young University

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Shane M. Sherlund

Federal Reserve Board of Governors

Date Written: May 6, 2014

Abstract

Many observers have argued that the fall in RMBS prices during the crisis was partly caused by fire sales. We provide an explanation for why financial institutions may have engaged in fire sales using a unique dataset of RMBS transactions for insurance companies. We show that risk-sensitive capital requirements and mark-to-market accounting can jointly create incentives for capital-constrained financial institutions to engage in fire sales of stressed securities because the increased risk can make it too expensive to hold such securities. Further, we find that, in general, RMBS prices behaved as would be expected in the presence of fire sales.

Keywords: Fire sale, RMBS, capital requirements, fair value, financial crisis

JEL Classification: G01, G21, G22, G23, M41

Suggested Citation

Merrill, Craig B. and Nadauld, Taylor and Stulz, René M. and Sherlund, Shane M., Were There Fire Sales in the RMBS Market? (May 6, 2014). Charles A. Dice Center Working Paper No. 2014-09; Fisher College of Business Working Paper No. 2014-03-09. Available at SSRN: https://ssrn.com/abstract=2436887 or http://dx.doi.org/10.2139/ssrn.2436887

Craig B. Merrill

Brigham Young University ( email )

Provo, UT 84602
United States
(801) 422-4782 (Phone)

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Taylor Nadauld

Brigham Young University ( email )

Provo, UT 84602
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Shane M. Sherlund

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Mailstop 93
Washington, DC 20551
United States
202-452-3589 (Phone)
202-728-5887 (Fax)

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