Were There Fire Sales in the RMBS Market?
Craig B. Merrill
Brigham Young University; Wharton Financial Institutions Center
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
May 6, 2014
Charles A. Dice Center Working Paper No. 2014-09
Fisher College of Business Working Paper No. 2014-03-09
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.
Number of Pages in PDF File: 58
Keywords: Fire sale, RMBS, capital requirements, fair value, financial crisis
JEL Classification: G01, G21, G22, G23, M41
Date posted: May 15, 2014