Do fire sales create externalities?

Sergey Chernenko and Adi Sunderam

Journal of Financial Economics, 2020, vol. 135, issue 3, 602-628

Abstract: We develop three novel measures of the incentives of equity mutual funds to internalize the price impact of their trading. We show that mutual funds with stronger incentives to internalize their price impact accommodate inflows and outflows by adjusting their cash buffers instead of trading in portfolio securities. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results provide evidence of meaningful fire sale externalities in the equity mutual fund industry.

Keywords: Fire sales; Liquidity management; Mutual funds (search for similar items in EconPapers)
JEL-codes: G11 G29 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:135:y:2020:i:3:p:602-628

DOI: 10.1016/j.jfineco.2019.08.001

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