Fire Sales, Indirect Contagion and Systemic Stress Testing

Date: 30 November 2016

We present an operational framework for quantifying the impact of deleveraging in stress scenarios by financial institutions subject to portfolio constraints. Market impact of portfolio deleveraging in stress scenarios leads to price-mediated contagion across institutions with similar holdings. We show that this loss contagion may be quantified through "liquidity-weighted overlaps" across portfolios and leads to indirect exposures to asset classes. Using data on European banks, we show that ...

Rama Cont Eric Schaanning

Complexity Economics

Fire Sales, Indirect Contagion and Systemic Stress Testing


Type: paper

Cont, R. & Schaanning, E. (2016). 'Fire Sales, Indirect Contagion and Systemic Stress Testing'. Norges Bank Working Paper.


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