Fire-Sale Spillovers and Systemic Risk
Revised: February 2015
JEL classification: G01, G10, G18, G20, G21, G23, G28, G32
We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed repo market data for broker-dealers and regulatory balance sheet data for U.S. bank holding companies. For
broker-dealers, vulnerabilities in the repo market are driven by
flight-to-quality episodes, when liquidity and leverage can change rapidly. We estimate that an exogenous 1 percent decline in the price of all assets financed with repos leads to losses owing to fire-sale spillovers of 8 percent of total broker-dealer equity on average and over 12 percent during the financial crisis. For bank holding companies, vulnerabilities to fire sales are equally sizable but build up slowly over time. Our measure signals buildup of systemic risk starting in the early 2000s, ahead of many other measures. Our measure also predicts low quantiles of macroeconomic outcomes above and beyond other existing measures, especially at longer horizons.