Fire Sales in Finance and Macroeconomics

By A. Shleifer, Robert W. Vishny. 2011

661 citations recorded by the source corpus.

Fire sales are forced sales of assets in which high-valuation bidders are sidelined, typically due to debt overhang problems afflicting many specialist bidders simultaneously. We overview theoretical and empirical research on asset fire sales, which shows how they can arise, how they can lead to asset under-valuations, how contracts and bankruptcy regimes adjust to the risk of fire sales, how fire sales can lead to downward spirals or cascades in asset prices, how arbitrage fails in the presence of fire sales, and how fire sales can reduce productive investment. We conclude by showing how asset fire sales shed light on several aspects of the recent financial crisis, and can account for the success of the liquidity provision and asset purchase policies of the Federal Reserve.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d3470ea744cc44f707b136fa602fc2f9a3ab92d2

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Citations in the corpus

Where Modern Macroeconomics Went Wrong (2017, positive): “Stiglitz (2016). The one exception to the view just expressed, that shocks are endogenous, relates to open emerging economies, where there is some evidence that many, if not most, come from abroad.”
The Growth and Limits of Arbitrage: Evidence from Short Interest (2014, neutral): “12 Chevalier and Ellison (1997) and Sirri and Tufano (1998) find a positive, convex performance-flow relationship for mutual funds.”
The Financial Crisis of 2007–2009: Why Did It Happen and What Did We Learn? (2015, neutral): “A market-wide liquidity crunch can lead to fire sales (e.g., Shleifer and Vishny 2011) that can depress asset prices, diminish financing capacity, and lead to insolvency.”
The Rise of Shadow Banking: Evidence from Capital Regulation (2018, positive): “Funding fragility may force financial institutions to sell assets to meet liquidity needs in a crisis, even when transactions must occur below fundamental values (Shleifer and Vishny 2011).”
Do Credit Market Shocks Affect the Real Economy? Quasi-experimental Evidence from the Great Recession and “Normal” Economic Times (2020, positive): “The mechanisms behind the unraveling of the financial system in 2008 are complex, and have been analyzed in depth by Brunnermeier (2009) and Shleifer and Vishny (2011) among others.”
Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy? (2011, neutral): “The recent Macro/Finance literature, including this article, follows in the vein of the classic studies on fire sales and financial accelerators (e.g. Bernanke and Gertler (1989), Kiyotaki and Moore (1997), Shleifer and Vishny (2011), Jermann and Quadrini (2012)).”
Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses (2011, positive): “More broadly, financial amplification effects (or financial accelerator effects) have not only played an essential role during the nearmeltdown of the financial sector in Fall 2008, but also in the ensuing credit crunch and the protracted slump of the housing sector (see Brunnermeier, 2008; Shleifer”
Fire Sales in a Model of Complexity (2009, neutral): “…include Allen and Gale (1994), Gromb and Vayanos (2002), Geanakoplos (2003, 2009), Lorenzoni (2008), Brunnermeier and Pedersen (2009), Acharya, Gale, and Yorulmazer (2011), Garleanu and Pedersen (2011), Stein (2012), and Diamond and Rajan (2011) (see Shleifer and Vishny (2011) for a recent survey).”
Syndication, Interconnectedness, and Systemic Risk (2018, positive): “(Shleifer and Vishny, 1992, 2011).5 The time-series evolution of our interconnectedness measure is consistent with interpretation of elevated systemic risk through contagion arising from common exposures.”