Fire Sales and Ex Ante Valuation of Systemic Risk: A Financial Equilibrium Networks Approach

Spiros Bougheas and Adam Spencer ()

No 544, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

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)
JEL-codes: D85 G32 G33 (search for similar items in EconPapers)
Date: 2022-11
New Economics Papers: this item is included in nep-net and nep-rmg
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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:nsr:niesrd:544

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