Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228987
Authors: 
Calimani, Susanna
Halaj, Grzegorz
┼╗ochowski, Dawid
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2373
Abstract: 
We develop an agent-based model of traditional banks and asset managers to investigate the contagion risk related to fire sales and balance sheet interactions. We take a structural approach to the price formation in fire sales as in Bluhm et al. (2014) and introduce a market clearing mechanism with endogenous formation of asset prices. We find that, first, banks which are active in both the interbank and securities markets may channel financial distress between the two markets. Second, while higher bank capital requirements decrease default risk and funding costs, they make it also more profitable to invest into less-liquid assets financed by interbank borrowing. Third, asset managers absorb small liquidity shocks, but they exacerbate contagion when their voluntary liquid buffers are fully utilised. Fourth, a system with larger and more interconnected agents is more prone to contagion risk stemming from funding shocks.
Subjects: 
fire sales
contagion
systemic risk
asset managers
agent-based model
JEL: 
C6
G21
G23
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4016-0
Document Type: 
Working Paper

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