2019/10/26 by Tathagata Banerjee, Zachary Feinstein, Banerjee, Tathagata +1
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #Economic theories and models #FOS: Economics and business #Mathematical Finance (q-fin.MF)
paper · pdf · doi:10.48550/arxiv.1910.12130
openalex publication_date 2019/10/26 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We develop a framework for price-mediated contagion in financial systems\nwhere banks are forced to liquidate assets to satisfy a risk-weight based\ncapital adequacy requirement. In constructing this modeling framework, we\nintroduce a two-tier pricing structure: the volume weighted average price that\nis obtained by any bank liquidating assets and the terminal mark-to-market\nprice used to account for all assets held at the end of the clearing process.\nWe consider the case of multiple illiquid assets and develop conditions for the\nexistence and uniqueness of clearing prices. We provide a closed-form\nrepresentation for the sensitivity of these clearing prices to the system\nparameters, and use this result to quantify: (1) the cost of regulation, in\nstress scenarios, faced by the system as a whole and the individual banks, and\n(2) the value of providing bailouts to consider when such notions are\nfinancially advisable. Numerical case studies are provided to study the\napplication of this model to data.\n