Financial Contagion and Asset Liquidation Strategies

TL;DR

This paper develops a framework to model financial contagion involving multiple illiquid assets, allowing for diverse liquidation strategies, and provides algorithms to compute equilibrium prices and payments during a crisis.

Contribution

It generalizes previous models by incorporating differing liquidation strategies and proves conditions for equilibrium existence with a computational algorithm.

Findings

Existence of equilibrium liquidation strategies established.

Unique clearing payments and prices proven under certain conditions.

Algorithm for computing maximal clearing payments and prices provided.

Abstract

This paper provides a framework for modeling the financial system with multiple illiquid assets during a crisis. This work generalizes the paper by Amini, Filipovic and Minca (2016) by allowing for differing liquidation strategies. The main result is a proof of sufficient conditions for the existence of an equilibrium liquidation strategy with corresponding unique clearing payments and liquidation prices. An algorithm for computing the maximal clearing payments and prices is provided.