Fire Sales by Euro Area Banks and Funds: What is Their Asset Price Impact?

46 Pages Posted: 23 Nov 2020

See all articles by Harun Mirza

Harun Mirza

European Central Bank (ECB)

Diego Moccero

European Central Bank (ECB)

Spyros Palligkinis

European Central Bank (ECB)

Cosimo Pancaro

European Central Bank (ECB)

Date Written: November, 2020

Abstract

The assets under management of investment funds have soared in recent years, triggering a debate on their possible implications for financial stability. We contribute to this debate assessing the asset price impact of fire sales in a novel partial equilibrium model of euro area funds and banks calibrated over the period between 2008 and 2017. An initial shock to yields causes funds to sell assets to address investor redemptions, while both banks and funds sell assets to keep their leverage constant. These fire sales generate second-round price effects. We find that the potential losses due to the price impact of fire sales have decreased over time for the system. The contribution of funds to this impact is lower than that of banks. However, funds’ relative contribution has risen due to their increased assets under management and banks’ lower leverage and rebalancing towards loans. Should this trend continue, funds will become an increasingly important source of systemic risk.

JEL Classification: G1, G21, G23

Suggested Citation

Mirza, Harun and Moccero, Diego and Palligkinis, Spyros and Pancaro, Cosimo, Fire Sales by Euro Area Banks and Funds: What is Their Asset Price Impact? (November, 2020). ECB Working Paper No. 20202491, Available at SSRN: https://ssrn.com/abstract=3735906

Harun Mirza (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diego Moccero

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Spyros Palligkinis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Cosimo Pancaro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
227
PlumX Metrics