Fire Sales in a Model of Complexity

By Ricardo J. Caballero, Alp Simsek. 2009

138 citations recorded by the source corpus.

We present a model of financial crises that stem from endogenous complexity. We conceptualize complexity as banks' uncertainty about the financial network of cross exposures. As conditions deteriorate, cross exposures generate the possibility of a domino effect of bankruptcies. As this happens, banks face an increasingly complex environment since they need to understand a greater fraction of the financial network to assess their own financial health. Complexity dramatically amplifies banks' perceived counterparty risk, and makes relatively healthy banks reluctant to buy risky assets. The model also features a novel complexity externality.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/5b6cb8bd620dee9ea3f4656df2b4a840bb35c4f0

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Citations in the corpus

Adverse Selection and Liquidity Distortion (2011, unknown): “Caballero and Simsek (2013), for example, considers the environment when banks are uncertain about the nancial network of cross exposures between nancial institutions. (43)Along this line, Jankowitsch et al. (2011) shows that there is indeed a correlation between price dispersion in over-the-count”
Climate risk and financial stability in the network of banks and investment funds (2020, unknown): “To encompass firesales contagion in our contagion framework, we build on the models discussed in Kiyotaki and Moore (2002); Greenwood et al. (2015); Caccioli et al. (2014); Cifuentes et al. (2005); Caballero and Simsek (2013).”
Where the Risks Lie: A Survey on Systemic Risk (2017, unknown): “In Caballero and Simsek (2013), banks know whether their counterparties have been hit by a negative shock, but know nothing about their counterparties’ 15 Boyson, Stahel, and Stulz (2010) find evidence for contagion of losses across different style cate- gories of hedge funds, and link this…”
Bank Networks: Contagion, Systemic Risk and Prudential Policy (2017, unknown): “For a similar argument see Caballero and Simsek (2013).”
Neglected Risks: The Psychology of Financial Crises (2015, background): “Such shocks ( sometimes referred to as “MIT shocks”; e.g., Caballero and Simsek 2013 are consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur, but they are harder to reconcile with the Reinhart Rogoff ( 2009 ) observation that…”
Systemic Risk and Stability in Financial Networks (2015, unknown): “…Ferrucci, and Shin (2005); Leitner (2005); Nier et al. (2007); Rotemberg (2011); Zawadowski (2011); Battiston et al. (2012); Gofman (2011, 2014); Caballero and Simsek (2013); Georg (2013); Cohen-Cole, Patacchini, and Zenou (2013); Denbee et al. (2014); Di Maggio and Tahbaz-Salehi (2014); and…”