Fire sales and ex ante valuation of systemic risk: A financial equilibrium networks approach

Spiros Bougheas and Adam Hal Spencer

No 2022/04, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: We introduce endogenous fire sales into a simple network model. For any given initial distribution of shocks across the network, we develop a clearing algorithm to solve for the financial equilibrium. We then utilise the results to perform ex ante risk assessment and derive risk premia for every balance sheet item where liabilities are differentiated according to priority rights. We find that risk premia reflect both idiosyncratic risk and risk of contagion (network risk). Moreover, we show that network risk magnifies the gap between the risk premia of equity and debt. We also perform comparative statics, showing that changes to the distribution of shocks and network structure can have substantial effects on the level of systemic losses.

Keywords: Networks; Fire Sales; Systemic Risk Premia; Risk Assessment (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-net and nep-rmg
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https://www.nottingham.ac.uk/cfcm/documents/papers/2022/22-04.pdf (application/pdf)

Related works:
Working Paper: Fire Sales and Ex Ante Valuation of Systemic Risk: A Financial Equilibrium Networks Approach (2022)
Working Paper: Fire Sales and Ex Ante Valuation of Systemic Risk: A Financial Equilibrium Networks Approach (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:2022/04

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