In this paper we point out the existence of a form of mark-to- market contagion that arises, in nancial systems, from the cross-holding of marketable debt. In networks of fi nancially interconnected agents where someone s assets are someone else s liabilities and such assets are marked-to-market we have a domino effect of debt defl ation that occurs even in the absence of defaults. When a fi nancial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, in as much as they mark it to market, suffer a loss that, in turn, worsens their own balance sheets and shrinks the market value of their own outstanding debt. In turn, this loss is born by the subscribers of such debt, and so forth and so on along the chains of fi nancial obligations that constitutes the fabric of the system. We analyze this mechanism of direct contagion in fi nancial networks and draw some preliminary results. JEL classi cation: C63,
Cross-holding of debt and mark-to-market contagion
EBOLI, MARIO
2009-01-01
Abstract
In this paper we point out the existence of a form of mark-to- market contagion that arises, in nancial systems, from the cross-holding of marketable debt. In networks of fi nancially interconnected agents where someone s assets are someone else s liabilities and such assets are marked-to-market we have a domino effect of debt defl ation that occurs even in the absence of defaults. When a fi nancial operator suffers a loss of value of some of its assets, this loss diminishes the market value of its outstanding debt. Then the holders of such debt, in as much as they mark it to market, suffer a loss that, in turn, worsens their own balance sheets and shrinks the market value of their own outstanding debt. In turn, this loss is born by the subscribers of such debt, and so forth and so on along the chains of fi nancial obligations that constitutes the fabric of the system. We analyze this mechanism of direct contagion in fi nancial networks and draw some preliminary results. JEL classi cation: C63,I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
