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Asset Fire Sales (and Purchases) in Equity Markets

Joshua D. Coval
Harvard Business School; National Bureau of Economic Research (NBER)

Erik Stafford
Harvard Business School

May 2005

NBER Working Paper No. W11357

Abstract:
This paper examines asset fire sales, and institutional price pressure more generally, in equity markets, using market prices of mutual fund transactions caused by capital flows from 1980 to 2003. Funds experiencing large outflows (inflows) tend to decrease (increase) existing positions, which creates price pressure in the securities held in common by these funds. Forced transactions represent a significant cost of financial distress for mutual funds. We find that investors who trade against constrained mutual funds earn highly significant returns for providing liquidity when few others are willing or able. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.

JEL Classifications: G14, G32, G20

Working Paper Series

Date posted: June 21, 2005 ; Last revised: June 21, 2005

Suggested Citation

Coval, Joshua D. and Stafford, Erik, Asset Fire Sales (and Purchases) in Equity Markets (May 2005). NBER Working Paper No. W11357. Available at SSRN: http://ssrn.com/abstract=727137

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Contact Information

Joshua D. Coval (Contact Author) Harvard Business School ( email ) Boston, MA 02163 United States
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Erik Stafford Harvard Business School ( email ) Boston, MA 02163 United States 617-495-8064 (Phone) 617-496-7357 (Fax)