Collateralised networks with two interacting channels of fire sales

Pang, Raymond and Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 (2025) Collateralised networks with two interacting channels of fire sales. SIAM Journal on Financial Mathematics. ISSN 1945-497X (In Press)

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Abstract

We develop a model for financial contagion in collateralised networks in which two channels of fire sales interact. We consider a financial market with multiple assets that can be used for both investment purposes and to satisfy collateral requirements. In our model, a fire sale can be triggered both before default when illiquid assets are sold to satisfy payment obligations and after default when collateral of defaulted institutions is sold. We investigate contagion that arises from the overlap in assets used for investment purposes and as collateral. In particular, we illustrate how fire sales triggered prior to default can reduce the effectiveness of collateralisation after a default. Our results highlight the importance of using high-quality assets as collateral to improve financial stability.

Item Type:	Article
Additional Information:	© 2026 The Author(s)
Divisions:	Mathematics
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Date Deposited:	22 Dec 2025 10:18
Last Modified:	22 Dec 2025 10:18
URI:	http://eprints.lse.ac.uk/id/eprint/130723

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