Forced Liquidation of an Investment Portfolio

This problem, which I call the Scholes liquidation problem, is ubiquitous during unstable financial periods. Indeed, in the recent financial crisis, banks incurred large losses during the forced contraction of their balance sheets, as access to short-term financing through repo markets dried up (e.g., Adrian and Shin 2008; Brunnermeier 2009). A systemic deleveraging process propagated through the banking sector, in which careful liquidation became tantamount to preserving wealth and surviving the storm. Previous work by Carlin, Lobo, and Viswanathan (2007) analyzes a simplified version of this problem: in an economy in which one asset is traded, how should a distressed participant sell off his holdings