Fire‐Sale Spillovers and Systemic Risk

By Fernando Duarte, Thomas Eisenbach. Journal of Finance, 2015

261 citations recorded by the source corpus.

We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013-Q1 produces fire sale externalities equal to 21 percent of system capital. For broker-dealers, a 1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 60 percent of system capital. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2007 but shows a notable increase starting in 2004, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce – and are victims of – most of the externalities, leverage and linkages of financial institutions also play important roles.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e2870d471c3a4b43d8476f90ae9791409b04e79d

Citations in the corpus

• Monetary Policy, Financial Conditions, and Financial Stability (2014, unknown): “Duarte and Eisenbach (2013) quantify repo runs and find large spillovers, with potentially systemic effects.”
• Where the Risks Lie: A Survey on Systemic Risk (2017, unknown): “Another strategy followed by Duarte and Eisenbach (2015) is to show that their risk measure Granger-causes most other systemic risk measures.”
• Fire sales, indirect contagion and systemic stress testing (2017, unknown): “Duarte and Eisenbach (2013) do not find evidence for significant higher round effects for US banks.”