Journal
JOURNAL OF MONETARY ECONOMICS
Volume 122, Issue -, Pages 17-37Publisher
ELSEVIER
DOI: 10.1016/j.jmoneco.2021.05.007
Keywords
Fire sales; RMBS; Capital requirement; Mark-to-market accounting; Subprime crisis
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Many observers argue that the fall in RMBS prices during the financial crisis was partly caused by fire sales, where forced sales occurred at discounted prices relative to fundamentals. Risk-sensitive capital requirements and mark-to-market accounting create incentives for financial institutions facing adverse capital shocks to sell stressed securities.
Many observers have argued that the fall in RMBS prices during the crisis was partly caused by fire sales. Using a unique dataset of RMBS transactions for insurance compa-nies, we show evidence supportive of a role, at the transaction level, of forced sales that occurred at discounted prices relative to fundamentals, and find that the RMBS market behaved as a whole as would be expected in the presence of fire sales. We show that risk -sensitive capital requirements and mark-to-market accounting can jointly create incentives for financial institutions subject to adverse capital shocks to sell stressed securities. (c) 2021 Elsevier B.V. All rights reserved.
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