Fire sales forensics: measuring endogenous risk
AbstractWe propose a tractable framework for quantifying the impact of fire sales on the volatility and correlations of asset returns in a multi-asset setting. Our results enable to quantify the impact of fire sales on the covariance structure of asset returns and provide a quantitative explanation for spikes in volatility and correlations observed during liquidation of large portfolios. These results allow to test for the presence of fire sales during a given period of time and to estimate the impact and magnitude of fire sales from observation of market prices: we give conditions for the identifiability of model parameters from time series of asset prices, propose an estimator for the magnitude of fire sales in each asset class and study the consistency and large sample properties of the estimator. We illustrate our estimation methodology with two empirical examples: the hedge fund losses of August 2007 and the Great Deleveraging following the default of Lehman Brothers in Fall 2008.
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Bibliographic InfoPaper provided by IESEG School of Management in its series Working Papers with number 2014-ACF-01.
Length: 37 pages
Date of creation: Aug 2013
Date of revision:
Other versions of this item:
- NEP-ALL-2013-09-25 (All new papers)
- NEP-BAN-2013-09-25 (Banking)
- NEP-ECM-2013-09-25 (Econometrics)
- NEP-LAM-2013-09-25 (Central & South America)
- NEP-LTV-2013-09-25 (Unemployment, Inequality & Poverty)
- NEP-NEU-2013-09-25 (Neuroeconomics)
- NEP-RMG-2013-09-25 (Risk Management)
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