Norges Bank paper offers method of stress testing with fire sales

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Researchers have designed a new method of stress testing that captures the effects of fire sales in a network of financial institutions with similar asset holdings, with their results published in a working paper by Norges Bank. Regulations since 2008 have reduced the risks from direct exposures, but authors Rama Cont of Imperial College London and Eric Schaanning of Norges Bank flag the risk of “indirect contagion”, where fire sales mean one portfolio may be affected by macro events that al