← Search

Journal of Financial Stability Vol. 71 2024

Modelling fire sale contagion across banks and non-banks

Fabio Caccioli1,2,3,4; Gerardo Ferrara5; Amanah Ramadiah6,7,3

1 London Mathematical Laboratory · 2 Systemic Risk Centre · 3 University College London · 4 London School of Economics and Political Science · 5 Bank of England · 6 University of Indonesia · 7 Financial Network Analytics (United Kingdom)

open access

Abstract

We examine the impact of fire sales on the UK financial system through commonly held assets across different financial sectors. In particular, we model indirect contagion via fire sales across UK banks and non-banks subject to different types of constraints. We find that performing a stress simulation that does not account for common asset holdings across multiple sectors can severely underestimate the fire sale losses in the financial system. In addition, pro-rata liquidation strategy would result in a higher level of fire sale losses in the system as whole, but a waterfall strategy may produce a higher spillover effect for a passive institution (or a passive sector) that chooses not to promptly liquidate any of its assets during distress while other institutions decide to do so.

DOI
10.1016/j.jfs.2024.101231
Volume
71
Pages
101231
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite