Co-Insurance in Mutual Fund Families
National University of Singapore
Emory University - Goizueta Business School
December 9, 2013
We show that fire sales by distressed funds are systematically offset by purchases of other funds in the same family. Our results suggest that these off-exchange trades are mainly the outcome of coordinated strategies at the fund manager level. This type of co-insurance is more likely when (i) there is reciprocity in repeated interactions, (ii) the same manager oversees the funds on both sides of the transaction, and (iii) the distressed fund holds more illiquid assets. Overall, co-insurance diminishes the price impact of widespread selling by distressed funds, and helps illiquid funds pay a lower cost of distress.
Number of Pages in PDF File: 43
Keywords: Mutual Fund Families, Internal Capital Markets, Asset Fire Sales, Price Impact, Stock Liquidity, Managerial Incentives, Co-Insurance, Implicit Contracts
JEL Classification: G11, G23, G30, G32
Date posted: August 17, 2009 ; Last revised: December 10, 2013
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