Fire‐Sale Spillovers and Systemic Risk

ABSTRACT We identify and track over time the factors that make the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing quickly in 2004, before most other major systemic risk measures, and triples by 2008. The fire‐sale‐specific f...

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Bibliographic Details
Published in:The Journal of finance (New York) 2021-06, Vol.76 (3), p.1251-1294
Main Authors: DUARTE, FERNANDO, EISENBACH, THOMAS M.
Format: Article
Language:English
Subjects:
Federal Reserve banks
Financial systems
Liquidity
Risk exposure
Sales
Vulnerability
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Summary:ABSTRACT We identify and track over time the factors that make the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing quickly in 2004, before most other major systemic risk measures, and triples by 2008. The fire‐sale‐specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks' contributions to aggregate vulnerability predict other firm‐specific measures of systemic risk, including SRISK and ΔCoVaR. The balance‐sheet‐based measures we propose are therefore useful early indicators of when and where vulnerabilities are building up.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13010