Fire Sale

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Fire Sale

A situation in which security prices are exceptionally low. This may be a buy signal, especially if the securities are fundamentally sound.
References in periodicals archive ?
These firms understood that a failure of LTCM could lead to massive fire sales of the assets that served as collateral for LTCM's repos.
In this instance, a market-organized solution was set up to prevent the fire sales that would otherwise have occurred, but only ex post.
To date, most of the research on postdefault fire sales has focused on the role of, and potential changes to, bankruptcy law (see, e.g., Acharya, Anshuman, and Viswanathan 2013; Antinolfi et al.
Section II describes the problem of fire sales in the tri-party repo market.
The risk of fire sales is a particularly acute concern in the tri-party repo market because of the size of dealers' portfolios and the strong incentives for some lenders to sell collateral quickly in a default event.
Fire sales in the tri-party repo market present a risk to financial stability because they affect all holders of the assets, even those beyond the triparty repo market.
All of this suggests another avenue of contagion and fire sales in the event of a dealer default in the tri-party repo market.
Fire sales can occur whenever a large volume of securities is sold in a short amount of time.
Predefault fire sales occur when a dealer loses access to market sources of secured funding.
Unless investor behavior is different in future stress episodes, the tri-party repo market may be at greater risk of fire sales than the bilateral repo market, because the tri-party lender base currently consists of many investors that (for the reasons noted above) have a more binary response to borrower stress than is typical in other secured funding markets--lend, or do not lend.
Creditors and counterparties calculated that LTCM and, accordingly, their claims, would be worth more over time if the liquidation of LTCM's portfolio was orderly as opposed to being subject to a fire sale. And with markets currently volatile and investors skittish, putting a special premium on the timely resolution of LTCM's problems seemed entirely appropriate as a matter of public policy.
What they were not collateralized against was the losses that might have occurred when prices moved even further and market liquidity dried up in a fire sale.