ABSTRACT
Whether Bank k has a liquidity shortfall on date 1 depends on a threshold α∗k , which is defined as
α∗k = βr1dk ρ
. (4)
When α ∈ [α∗k , 1], Bank k has no liquidity shortfall (i.e. no fire-sale); when α ∈ [0,α∗k ), Bank k has a positive liquidity shortfall and some bank assets are sold in a fire-sale. A smaller α∗k (lower threshold) implies that Bank k has a smaller liquidity risk.
