Fire Sales, Default Cascades and Complex Financial Networks

58 Pages Posted: 5 Oct 2021 Last revised: 15 Oct 2021

See all articles by Hamed Amini

Hamed Amini

Georgia State University

Zhongyuan Cao

INRIA Paris

Agnes Sulem

INRIA Paris

Date Written: October 4, 2021

Abstract


We present a general tractable framework for understanding the joint impact of fire sales and default cascades on systemic risk in complex financial networks. Our limit theorems quantify how price mediated contagion across institutions with common asset holding could worsen cascades of insolvencies in a heterogeneous financial network, during a financial crisis. For given prices of illiquid assets, we show that, under some regularity assumptions, the default cascade model could be transferred to a death process problem represented by balls-and-bins model. We model the price impact by a given inverse demand function. We state various limit theorems regarding the total sold shares and the equilibrium price of illiquid assets in a stylized fire sales model. In particular, we show that the equilibrium prices of illiquid assets has asymptotically Gaussian fluctuations. Our numerical studies investigate the effect of heterogeneity in network structure and price impact function on the final size of default cascade and fire sales loss.

Keywords: Fire Sales, Default Contagion, Financial Networks, Systemic Risk.

JEL Classification: G01, G28

Suggested Citation

Amini, Hamed and Cao, Zhongyuan and Sulem, Agnes, Fire Sales, Default Cascades and Complex Financial Networks (October 4, 2021). Available at SSRN: https://ssrn.com/abstract=3935450 or http://dx.doi.org/10.2139/ssrn.3935450

Hamed Amini (Contact Author)

Georgia State University ( email )

Georgia State University
Atlanta, GA 30303
United States

Zhongyuan Cao

INRIA Paris ( email )

2 rue
Simone Iff
Paris, 75589
France

Agnes Sulem

INRIA Paris ( email )

2 rue Simone Iff, CS 42112
Paris, 75589
France

HOME PAGE: http://https://www.rocq.inria.fr/mathfi/Sulem.html

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