Liquidity Risk and Contagion. Rodrigo Cifuentes, Gianluigi Ferrucci and Hyun Song Shin. Two Themes. Liquidity risk in a system context Counterparty risk. Background. Mark-to-market accounting of assets Prudential constraints on discretion Capital requirements Risk-management systems.
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Rodrigo Cifuentes, Gianluigi Ferrucci
and Hyun Song Shin
is total payment by bank i
(pro rata payments)
Unique fixed point
Eisenberg and Noe (2001)
top: net worth
bottom: marked-to-market assets, after
s sale of illiquid asset
t sale of liquid asset
= market-clearing price of illiquid asset
when balance sheets are evaluated
at price p.
Equilibrium is a fixed point of
Capital adequacy satisfied?