## Fire Sales in Frozen Markets

_IMF Working Papers, May 6, 2019_

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## Bibliographic details
- Authors: Ehsan Ebrahimy
- Published: May 6, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498303804.001

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### Main findings
- Existing models of fire-sale struggle to explain the collapse in the price of subprime mortgage-backed securities (MBS) during the Financial Crisis of 2008.
- Fire-sales can occur even when there is a relatively sizable pool of natural buyers and in the absence of asymmetric information, driven by a coordination failure among buyers.
- Buyers’ waiting to trade at a lower price tomorrow can lead to a collapse in the price and trade volume today.
- When trade is decentralized and participation is endogenous, a medium level of asset demand and liquidity needs that are expected to increase over time create complementarity among buyers’ decisions to wait.
- This complementarity makes competitive markets prone to coordination failures and fire-sales accompanied by a collapse in trade volume.
- Fire-sales in this setup may be inefficient.

### Model mechanics and channel
- Decentralized trade with endogenous participation is the core environment analyzed.
- Complementarity among buyers’ waiting decisions:
  - Buyers expect liquidity needs to increase over time.
  - Medium asset demand combined with rising liquidity needs generates incentives for buyers to delay purchase.
  - Delayed purchasing by multiple buyers reduces current demand, producing lower current prices and lower trade volume.
- The resulting equilibrium can be a "fire-sale equilibrium" characterized by simultaneous price collapse and volume collapse even without asymmetric information or few natural buyers.

### Policy analysis and recommendations
- The paper discusses various policy options to eliminate the risk of fire-sales in the described setup.
- Policy options are evaluated in the context of:
  - Preventing coordination failures among buyers.
  - Mitigating incentives to wait for lower prices when participation is endogenous.
  - Addressing market decentralization features that facilitate complementarity in waiting decisions.

### Subject areas and keywords (as listed)
- Subject: Asset and liability management, Asset liquidity, Asset prices, Financial markets, Liquidity, Prices, Securities markets
- Keywords: Asset liquidity, asset market, asset Markets1, asset price, Asset prices, decentralized asset Markets1, equilibrium price, fire-sale equilibrium, inefficient fire-sale, Liquidity, price impact, Securities markets, WP

*Ehsan Ebrahimy. "Fire Sales in Frozen Markets", IMF Working Papers, May 6, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/06/inefficient-fire-sales-in-decentralized-asset-markets-46688_