Asset fire sales and strategic trading by regulated banks

This paper aims to understand how regulatory constraints such as liquidity and capital requirements affect the behaviour of banks participating in and impacting the open market for banking assets. Strategies that account for... [ view full abstract ]

This paper aims to understand how regulatory constraints such as liquidity and capital requirements affect the behaviour of banks participating in and impacting the open market for banking assets. Strategies that account for the trading of other banks can replace the naive bank behaviour assumptions currently adopted in systemic risk models. A multi-agent game is introduced, where each agent is a bank that trades a single risky asset while satisfying requirements set up by the regulator. Each bank's trades are assumed to have a significant impact on the price, which must be taken into account in all other banks' strategies.