kaal:claim:2748096-021

When hedge funds simultaneously liquidate positions and reduce leverage, leverage generates a fire-sale externality that raises systemic risk, arising when a fund must sell assets it regards as drastically undervalued in order to meet margin calls or redemption requests.

Source quote, verbatim

If hedge funds simultaneously liquidate positions and reduce leverage, leverage can also increase the risk of a fire-sale externality that increases systemic risk.

From

Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016), Leverage, p. 8
https://ssrn.com/abstract=2748096 · source PDF

Cite as

Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096

Holds when

simultaneous deleveraging across funds
binding margin calls or redemption requests

Classification

failuresupport: arguedfailure: fire-sale externalityfamily: systemic-risk-transmissionsystemic-riskrisk-and-incentives

Verify

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