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A repo model of fire sales with VWAP and LOB pricing mechanisms

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  • Bichuch, Maxim
  • Feinstein, Zachary

Abstract

We consider a network of banks that optimally choose a strategy of asset liquidations and borrowing in order to cover short term obligations. The borrowing is done in the form of collateralized repurchase agreements, the haircut level of which depends on the total liquidations of all the banks. Similarly the fire-sale price of the asset obtained by each of the banks depends on the amount of assets liquidated by the bank itself and by other banks. By nature of this setup, banks’ behavior is considered as a Nash equilibrium. This paper provides two forms for market clearing to occur: through a common closing price and through an application of the limit order book. The main results of this work are providing the existence of maximal and minimal clearing solutions (i.e., liquidations, borrowing, fire sale prices, and haircut levels) as well as sufficient conditions for uniqueness of the clearing solutions.

Suggested Citation

  • Bichuch, Maxim & Feinstein, Zachary, 2022. "A repo model of fire sales with VWAP and LOB pricing mechanisms," European Journal of Operational Research, Elsevier, vol. 296(1), pages 353-367.
    • Handle: RePEc:eee:ejores:v:296:y:2022:i:1:p:353-367
    DOI: 10.1016/j.ejor.2021.04.040
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    Cited by:

    1. Feinstein, Zachary & Hałaj, Grzegorz, 2023. "Interbank asset-liability networks with fire sale management," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    2. Maxim Bichuch & Nils Detering, 2022. "Optimal Support for Distressed Subsidiaries -- a Systemic Risk Perspective," Papers 2201.12731, arXiv.org, revised Mar 2024.

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