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Fire sales of safe assets

Author

Listed:
  • Gabor Pinter

    (Bank for International Settlements)

  • Emil Siriwardane

    (Harvard Business School and NBER)

  • Danny Walker

    (Bank of England)

Abstract

We use trade‑level data to study price pressure effects in the UK gilt market from September to October 2022. During this period, forced sales by liability‑driven investment funds (LDI funds) led to price discounts on the order of 10%, accounting for roughly half the total decline in gilt prices. Balance sheet segmentation and operational issues slowed equity injections into LDIs by well‑capitalised pension investors, leading LDIs to instead sell gilts. This effect was most pronounced for pooled LDIs, which invest on behalf of multiple pension schemes, because of co‑ordination problems between pensions. Hedge funds also appear to have delayed entry to time the bottom of the fire sale. Overall, our findings illustrate how capital can be slow moving internally, due to contracting frictions, and externally, due to strategic arbitrager behaviour.

Suggested Citation

  • Gabor Pinter & Emil Siriwardane & Danny Walker, 2024. "Fire sales of safe assets," Bank of England working papers 1089, Bank of England.
    • Handle: RePEc:boe:boeewp:1089
    as

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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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