Assessing and mitigating fire sales risk under partial information

Pang, Raymond Ka-Kay and Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 (2023) Assessing and mitigating fire sales risk under partial information. Journal of Banking and Finance, 155. ISSN 0378-4266

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Abstract

We consider the problem of assessing and mitigating fire sales risk for banks under partial information. Using data from the European Banking Authority's stress tests, we consider the matrix of asset holdings of different banks. We first analyse fire sales risk under both full and partial information using different matrix reconstruction methods. We then investigate how well some policy interventions aimed at mitigating fire sales risk perform if they are applied based on only partial information. We find that even under partial information, using suitable network reconstruction methods to decide on policy interventions can significantly mitigate risk from fire sales. Furthermore, we show that some interventions based on reconstructed networks significantly outperform ad hoc methods that decide on interventions only based on the size of an institution and do not account for overlapping portfolios.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-b...
Additional Information:	© 2023 The Author(s)
Divisions:	Mathematics
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G20 - General G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Date Deposited:	07 Sep 2023 09:00
Last Modified:	12 Dec 2024 03:52
URI:	http://eprints.lse.ac.uk/id/eprint/120171

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