Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315138 
Year of Publication: 
2025
Series/Report no.: 
Texto para discussão No. 706
Publisher: 
Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia, Rio de Janeiro
Abstract: 
Why do fire sales occur if many risks are hedgeable? We study a version of Brunnermeier and Sannikov (2014) in which all fundamental risks can be hedged frictionlessly. Our analysis shows that fire sales are inherently self-fulfilling. Fundamental shocks can never cause fire sales, and an efficient, safe equilibrium exists. On the other hand, there exists an equilibrium in which agents coordinate fire sales on non-fundamental shocks. A simple refinement based on vanishingly-small perceived fundamental risk eliminates the safe equilibrium and selects the fire sale equilibrium as the unique outcome.
Subjects: 
financial frictions
fire sales
self-fulfilling equilibria
financial crises
hedging
JEL: 
E00
E44
G01
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.