Distress selling and asset market feedback

BIS Working Papers No 229
June 2007

Published in: Financial Markets, Institutions and Instruments, vol 16, no 5, December 2007.


This paper examines the process of distress selling and asset market feedback. It splits this process into several stages, in order to analyse what triggers distress selling, why asset prices fall, and how falling prices generate additional rounds of selling. This framework enables us to understand and compare models relevant to distress selling from diverse literatures. The paper also considers what policy options are available at each stage to mitigate the adverse economic consequences of distress selling and asset market feedback.

JEL classification: G10, G18, G33, E44, E58

Keywords: Financial distress, distress selling, asset market feedback, banking crises, financial instability.