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...ock leverage, 1× bit−1. For sufficiently large shocks, some banks may be selling all of their assets. We take this into account in our empirical implementation by using xit = min { ait, λtb∗itait∑kmikt fkt } . 18There is vast theoretical literature highlighting different dynamic trade-offs for portfolio liquidations. Liquid assets have an option value if markets can be even more illiquid in the future (Ang et al., 2014). The volatility and speed of mean-reversion of asset prices also play a role in shaping incentives of a risk averse manager to dispose of them (Almgren and Chriss, 1999, 2001; Gârleanu and Pedersen, 2016). Independent of the elasticity of prices with respect to the amount sold, whether price impacts are transitory or permanent can alter the timing of liquidation of assets with different degrees of liquidity (Almgren and Chriss, 1999, 2001; Brown et al., 2010). The dynamic considerations for asset liquidations interact strongly with the decision of what assets to sell first. Selling themost liquid assets first has the important advantage of minimizing the price impact of fire sales, which may reduce total losses. Illiquid assets could be optimally sold first if their price is expected to decrea...

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...Price impact has been studied extensively in the optimal execution literature, see, e.g., [4, 1, 30]. Recently, increasing attention has also been devoted to its influence on dynamic portfolio choice =-=[13, 12, 2, 17, 7, 27]-=-. 1 ar X iv :1 40 2. 53 06 v1s[ qfin .PM ]s21sFe b 2 01 4 To make the model tractable, we focus on a single risky asset with constant investment opportunities, and a representative agent with constant...

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... order flow from market dynamics and investors’ preferences. Here, previous work has focused on price impact linear in the order size, in concrete models with specific market dynamics and preferences =-=[23, 22, 3, 13, 26, 27]-=-; see Section 5.1 for a detailed discussion. In the present study, we also focus on linear price impact. However, we allow for arbitrary preferences, as well as for general Markovian dynamics of marke...

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...s of a given order.1 Concrete specifications of this model are very tractable, for optimal execution [4, 2, 27] and – if price impact is linear – also for more involved problems like portfolio choice =-=[11, 10, 14, 22]-=- and hedging [5, 22]. In particular, fully explicit formulas obtain in the limit for small linear temporary impacts even in very general settings [22]. The model of Obizhaeva/Wang [23] is structural, ...