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SUMMARY:Fire sales\, endogenous risk and price-mediated contagion - Cont\,
  R (Imperial College London/CNRS)
DTSTART:20140925T090000Z
DTEND:20140925T094500Z
UID:TALK54518@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Fire sales of assets during financial crises have been recogni
 zed as an important channel of contagion and amplification of losses We pr
 esent a simple model of feedback and contagion through fire sales triggere
 d by an initial macro-shock to a set of leveraged portfolios with common e
 xposures and subject to leverage constraints.\nWe show that the threshold 
 nonlinearity inherent in the onset of fire sales plays a key role in the a
 mplifying of shocks to portfolios\, and investigate  the role of portfolio
  constraints -leverage constraints and capital ratios- and the tradeoff be
 tween diversification and 'diversity' in determining the magnitude of cont
 agion.\nThe competition between contagion across portfolios and market imp
 act of liquidation ('self-contagion') leads to a non-monotone dependence o
 f the system-wide losses on parameters describing portfolio concentration\
 , with different results depending on the severity of the stress scenarios
  considered.  \nIn particular\, the model indicates that\, for a given lev
 el of severity of the stress\, the onset of contagion occurs when leverage
  is allowed to exceed a critical level\, a criterion which can be used to 
 calibrate regulatory  constraints on leverage.\n
LOCATION:Seminar Room 1\, Newton Institute
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