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Co-Insurance in Mutual Fund Families

43 Pages Posted: 17 Aug 2009 Last revised: 10 Dec 2013

Luis Goncalves-Pinto

Chinese University of Hong Kong - Department of Finance

Breno Schmidt

Emory University - Goizueta Business School

Date Written: December 9, 2013

Abstract

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.

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

Suggested Citation

Goncalves-Pinto, Luis and Schmidt, Breno, Co-Insurance in Mutual Fund Families (December 9, 2013). Available at SSRN: https://ssrn.com/abstract=1455929 or http://dx.doi.org/10.2139/ssrn.1455929

Luis Goncalves-Pinto (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

Cheng Yu Tung Building
Shatin
Hong Kong
Hong Kong

Breno Schmidt

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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