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Optimization of Fire Sales and Borrowing in Systemic Risk

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  • Maxim Bichuch
  • Zachary Feinstein

Abstract

This paper provides a framework for modeling financial contagion in a network subject to fire sales and price impacts, but allowing for firms to borrow to cover their shortfall as well. We consider both uncollateralized and collateralized loans. The main results of this work are providing sufficient conditions for existence and uniqueness of the clearing solutions (i.e., payments, liquidations, and borrowing); in such a setting any clearing solution is the Nash equilibrium of an aggregation game.

Suggested Citation

  • Maxim Bichuch & Zachary Feinstein, 2018. "Optimization of Fire Sales and Borrowing in Systemic Risk," Papers 1802.04232, arXiv.org, revised Oct 2018.
    • Handle: RePEc:arx:papers:1802.04232
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    File URL: http://arxiv.org/pdf/1802.04232
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    References listed on IDEAS

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    10. Zachary Feinstein, 2017. "Obligations with Physical Delivery in a Multi-Layered Financial Network," Papers 1702.07936, arXiv.org, revised May 2019.
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    Cited by:

    1. Zachary Feinstein, 2018. "Capital Regulation under Price Impacts and Dynamic Financial Contagion," Papers 1807.02711, arXiv.org, revised Aug 2019.
    2. Agathe Sadeghi & Zachary Feinstein, 2024. "Statistical Validation of Contagion Centrality in Financial Networks," Papers 2404.14337, arXiv.org.
    3. Tathagata Banerjee & Zachary Feinstein, 2018. "Pricing of debt and equity in a financial network with comonotonic endowments," Papers 1810.01372, arXiv.org, revised Sep 2021.
    4. T. R. Hurd, 2018. "Bank Panics And Fire Sales, Insolvency And Illiquidity," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(06), pages 1-30, September.

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