Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269099 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2692
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Overlapping portfolios constitute a well-recognised source of risk, providing a channel for financial contagion induced by the market price impact of asset deleveraging. We introduce a novel method to assess the market price impact on a security-by-security basis from historical daily traded volumes and price returns. Systemic risk within the euro area financial system of banks and investment funds is then assessed by considering contagion between individual institutions' portfolio holdings under a severe stress scenario. As a result, we show how the bias of more homogeneous estimation techniques, commonly employed for market impact, might lead to loss estimates that are more than twice as large as losses estimated with heterogeneous price impact parameters. Another new feature in this work is the application of a price-at-risk measure instead of the average market price impact to evaluate the tail risk of possible market price movements in scenarios of different severity. Our results also show that system-level losses at the tail can be three times higher than average losses using the same scenario.
Subjects: 
Price impact
fire sales
indirect contagion
overlapping portfolios
quantile regression
JEL: 
G01
G12
G17
G23
G32
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5276-7
Document Type: 
Working Paper

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