Advanced Search
MyIDEAS: Login to save this paper or follow this series

Distress selling and asset market feedback

Contents:

Author Info

  • Ilhyock Shim
  • Goetz von Peter

Abstract

This paper examines the process of distress selling and asset market feedback. It splits this process into several stages, in order to analyse what triggers distress selling, why asset prices fall, and how falling prices generate additional rounds of selling. This framework enables us to understand and compare models relevant to distress selling from diverse literatures. The paper also considers what policy options are available at each stage to mitigate the adverse economic consequences of distress selling and asset market feedback.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bis.org/publ/work229.pdf
File Function: Full PDF document
Download Restriction: no

File URL: http://www.bis.org/publ/work229.htm
Download Restriction: no

Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 229.

as in new window
Length: 55 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:bis:biswps:229

Contact details of provider:
Postal: Centralbahnplatz 2, CH - 4002 Basel
Phone: (41) 61 - 280 80 80
Fax: (41) 61 - 280 91 00
Email:
Web page: http://www.bis.org/
More information through EDIRC

Related research

Keywords: Financial distress; distress selling; asset market feedback; banking crises; financial instability;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Cordoba, Juan & Ripoll, Marla, 2002. "Credit Cycles Redux," Working Papers, Rice University, Department of Economics 2002-07, Rice University, Department of Economics.
  2. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers, University of California at Berkeley RPF-184, University of California at Berkeley.
  3. (Kim | Lopez-Salido | Swanson) & Andrew Levin, 2004. "The magnitude and Cyclical Behavior of Financial Market Frictions," Computing in Economics and Finance 2004, Society for Computational Economics 224, Society for Computational Economics.
  4. Narayana Kocherlakota & Ilhyock Shim, 2005. "Forbearance and Prompt Corrective Action," 2005 Meeting Papers, Society for Economic Dynamics 324, Society for Economic Dynamics.
  5. Shin, Hyun Song, 2008. "Risk and liquidity in a system context," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(3), pages 315-329, July.
  6. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(2), pages 479-512, November.
  7. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
  8. Hyun Song Shin & Stephen Morris, 2004. "Liquidity Black Holes," Econometric Society 2004 North American Winter Meetings, Econometric Society 620, Econometric Society.
  9. Claudio E. V. Borio & Kostas Tsatsaronis, 2005. "Accounting, prudential regulation and financial stability: elements of a synthesis," BIS Working Papers 180, Bank for International Settlements.
  10. Jeffrey M. Lacker, 2003. "Payment system disruptions and the Federal Reserve following September 11, 2001," Working Paper, Federal Reserve Bank of Richmond 03-16, Federal Reserve Bank of Richmond.
  11. Brown, David T. & James, Christopher M. & Mooradian, Robert M., 1994. "Asset sales by financially distressed firms," Journal of Corporate Finance, Elsevier, Elsevier, vol. 1(2), pages 233-257, August.
  12. Prasanna Gai & Sujit Kapadia & Stephen Millard & Ander Perez, 2008. "Financial innovation, macroeconomic stability and systemic crises," Bank of England working papers, Bank of England 340, Bank of England.
  13. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  14. Denis Gromb & Dimitri Vayanos, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 448, London School of Economics and Political Science, LSE Library.
  15. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(3), pages 939-978, 06.
  16. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
  17. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1725, Harvard - Institute of Economic Research.
  18. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  19. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  20. Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
  21. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  22. Mukarram Attari & Antonio S. Mello & Martin E. Ruckes, 2005. "Arbitraging Arbitrageurs," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2471-2511, October.
  23. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, INFORMS, vol. 52(9), pages 1301-1314, September.
  24. Mathias Dewatripont & Philippe Aghion & Patrick Bolton, 2000. "Contagious bank failures in a free banking system," ULB Institutional Repository 2013/9737, ULB -- Universite Libre de Bruxelles.
  25. Nobuo Inaba & Takashi Kozu & Toshitaka Sekine & Takashi Nagahata, 2005. "Non-performing loans and the real economy: Japan’s experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 106-27 Bank for International Settlements.
  26. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, American Finance Association, vol. 60(2), pages 615-647, 04.
  27. Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004. "Predatory Trading," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4639, C.E.P.R. Discussion Papers.
  28. S. Rao Aiyagari & Mark Gertler, 1999. ""Overreaction" of Asset Prices in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 3-35, January.
  29. Wagner, Wolf, 2007. "Aggregate liquidity shortages, idiosyncratic liquidity smoothing and banking regulation," Journal of Financial Stability, Elsevier, Elsevier, vol. 3(1), pages 18-32, April.
  30. Javier Suarez & Oren Sussman, 2007. "Financial distress, bankruptcy law and the business cycle," Annals of Finance, Springer, Springer, vol. 3(1), pages 5-35, January.
  31. von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(3), pages 298-319, September.
  32. Plantin, Guillaume & Sapra, Haresh & Shin, Hyun-Song, 2005. "Marking to Market, Liquidity, and Financial Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(S1), pages 133-155, October.
  33. Xavier Freixas & Curzio Giannini & Glenn Hoggarth & Farouk Soussa, 2000. "Lender of Last Resort: What Have We Learned Since Bagehot?," Journal of Financial Services Research, Springer, Springer, vol. 18(1), pages 63-84, October.
  34. Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
  35. Geoffrey Wood, 2000. "The Lender of Last Resort Reconsidered," Journal of Financial Services Research, Springer, Springer, vol. 18(2), pages 203-227, December.
  36. Adam B. Ashcraft, 2005. "Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1712-1730, December.
  37. Berkelaar, A.B. & Kouwenberg, R.R.P., 2000. "Optimal portfolio choice under loss aversion," Econometric Institute Research Papers EI 2000-08/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  38. Antonio Bernardo & Ivo Welch, 2006. "Liquidity and Financial Market Runs," Yale School of Management Working Papers, Yale School of Management ysm280, Yale School of Management, revised 01 Aug 2003.
  39. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  40. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers, University of California at Berkeley, Economics Department _124, University of California at Berkeley, Economics Department.
  41. Simon Kwan, 2000. "Margin requirements as a policy tool?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar24.
  42. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
  43. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(1), pages 1-22, February.
  44. James J. McAndrews & Simon M. Potter, 2002. "Liquidity effects of the events of September 11, 2001," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Nov, pages 59-79.
  45. Bank for International Settlements, 2001. "The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 06, 8.
  46. William R. White, 2004. "Are changes in financial structure extending safety nets?," BIS Working Papers 145, Bank for International Settlements.
  47. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," Scholarly Articles 12490629, Harvard University Department of Economics.
  48. Mara Faccio & Rajdeep Sengupta, 2006. "Corporate response to distress: evidence from the Asian financial crisis," Working Papers, Federal Reserve Bank of St. Louis 2006-044, Federal Reserve Bank of St. Louis.
  49. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
  50. David T. Brown, 2000. "Liquidity and Liquidation: Evidence from Real Estate Investment Trusts," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 469-485, 02.
  51. Donaldson, R. Glen, 1992. "Costly liquidation, interbank trade, bank runs and panics," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 2(1), pages 59-82, March.
  52. Canova, Fabio, 1994. "Were Financial Crises Predictable?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(1), pages 102-24, February.
  53. Gikas A. Hardouvelis, 1989. "Margin requirements, volatility and the transitory component of stock prices," Research Paper, Federal Reserve Bank of New York 8909, Federal Reserve Bank of New York.
  54. Dong He, 2000. "Emergency Liquidity Support Facilities," IMF Working Papers 00/79, International Monetary Fund.
  55. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  56. Paul Kupiec & Steve Sharpe, 1989. "Animal spirits, margin requirements, and stock price volatility," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 91, Board of Governors of the Federal Reserve System (U.S.).
  57. Elijah Brewer & William Jackson, 2000. "Requiem for a Market Maker: The Case of Drexel Burnham Lambert and Junk Bonds," Journal of Financial Services Research, Springer, Springer, vol. 17(3), pages 209-235, September.
  58. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 415-436, October.
  59. Myron S. Scholes, 2000. "Crisis and Risk Management," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 17-21, May.
  60. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, pages 3-25.
  61. Leslie Teo & Charles Enoch & Carl-Johan Lindgren & Tomás J. T. Baliño & Anne Marie Gulde & Marc Quintyn, 2000. "Financial Sector Crisis and Restructuring," IMF Occasional Papers 188, International Monetary Fund.
  62. Claudio E. V. Borio, 2004. "Market distress and vanishing liquidity: anatomy and policy options," BIS Working Papers 158, Bank for International Settlements.
  63. Danielsson, Jon & Shin, Hyun Song & Zigrand, Jean-Pierre, 2004. "The impact of risk regulation on price dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(5), pages 1069-1087, May.
  64. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
  65. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 11(Sep).
  66. Gikas A. Hardouvelis & Panayiotis Theodossiou, 2002. "The Asymmetric Relation Between Initial Margin Requirements and Stock Market Volatility Across Bull and Bear Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(5), pages 1525-1560.
  67. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance, EconWPA 0411034, EconWPA.
  68. Subrahmanyam, Avanidhar, 1994. " Circuit Breakers and Market Volatility: A Theoretical Perspective," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 237-54, March.
  69. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  70. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 713-718, May.
  71. Chowdhry, Bhagwan & Nanda, Vikram, 1998. "Leverage and Market Stability: The Role of Margin Rules and Price Limits," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 71(2), pages 179-210, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Claudio Borio, 2011. "Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward," BIS Working Papers 354, Bank for International Settlements.
  2. Goetz von Peter, 2004. "Asset prices and banking distress: a macroeconomic approach," BIS Working Papers 167, Bank for International Settlements.
  3. Philip Turner, 2012. "Weathering financial crisis: domestic bond markets in EMEs," BIS Papers chapters, in: Bank for International Settlements (ed.), Weathering financial crises: bond markets in Asia and the Pacific, volume 63, pages 15-34 Bank for International Settlements.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bis:biswps:229. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.