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Quantitative Finance · Glossary

What is Liquidation cascade?

Definition 18.7 Markets III: Commodities, Energy and Crypto · Chapter 18 — Margin, Liquidation and Loss Allocation

A liquidation cascade is a sequence in which forced sales by liquidation engines move the price enough to reach further positions’ liquidation prices, whose forced sales move it further.

The local cascade multiplier of for the tutorial’s 4 000 leveraged longs (USD 167 million of notional, leverage from 2 to 50 times) and an impact of 0.12% of the price per USD 1 million sold; the dashed line marks = 1. Between about 92 and 96 the multiplier exceeds one: a cascade that reaches that zone runs through it. Synthetic positions. Data: the chapter’s tutorial.
Figure 18.3. The local cascade multiplier of Proposition 18.8 for the tutorial’s 4 000 leveraged longs (USD 167 million of notional, leverage from 2 to 50 times) and an impact of 0.12% of the price per USD 1 million sold; the dashed line marks κ=1\kappa = 1. Between about 92 and 96 the multiplier exceeds one: a cascade that reaches that zone runs through it. Synthetic positions. Data: the chapter’s tutorial.
Total fall after the cascade as a function of the initial shock, for the base case and three ablations. In the base case the fall jumps from under 4% to over 10% between shocks of 1.0% and 1.25%; capping leverage at ten times moves the jump past 5%, and a book twice as deep removes it. Synthetic positions and book. Data: the chapter’s tutorial.
Figure 18.4. Total fall after the cascade as a function of the initial shock, for the base case and three ablations. In the base case the fall jumps from under 4% to over 10% between shocks of 1.0% and 1.25%; capping leverage at ten times moves the jump past 5%, and a book twice as deep removes it. Synthetic positions and book. Data: the chapter’s tutorial.
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