Co-Insurance in Mutual Fund Families
43 Pages Posted: 17 Aug 2009 Last revised: 7 Mar 2022
Date Written: March 3, 2022
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: Suggested Citation