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Fire sales of safe assets

Author

Listed:
  • Gabor Pinter
  • Emil Siriwardane
  • Danny Walker

Abstract

We use trade-level data to study price pressure effects in the UK gilt market from September to October 2022. During this period, forced sales by liability-driven investment funds (LDIs) led to price discounts on the order of 10%, accounting for roughly half the total decline in gilt prices. Balance sheet segmentation and operational issues slowed equity injections into LDIs by well-capitalized pension investors, leading LDIs to instead sell gilts. This effect was most pronounced for pooled LDIs, which invest on behalf of multiple pension schemes, because of coordination problems between pensions. Hedge funds also appear to have delayed entry to time the bottom of the fire sale. Overall, our findings illustrate how capital can be slow moving internally, due to contracting frictions, and externally, due to strategic arbitrager behavior.

Suggested Citation

  • Gabor Pinter & Emil Siriwardane & Danny Walker, "undated". "Fire sales of safe assets," BIS Working Papers 1233, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1233
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    More about this item

    Keywords

    fire sales; limits to arbitrage; slow-moving capital; non-bank financial institutions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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