Asset Fire Sales, Liquidity Provision, and Mutual Fund Performance

49 Pages Posted: 22 Mar 2010

See all articles by Hanjiang Zhang

Hanjiang Zhang

Washington State University - Carson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2010

Abstract

This paper identifies managerial ability by looking at extreme liquidity events. Forced trades by distressed funds – those that are experiencing severe money outflows – generate temporary downward price pressure on securities held in common by these funds and therefore create trading opportunities for other investors. This paper shows that some fund managers are able to consistently identify and purchase these fire-sale stocks and that they benefit from providing liquidity to distressed funds. Moreover, these managers exhibit overall investment skills beyond identifying fire-sale stocks, which lead to superior performance for the rest of their portfolios. The performance results remain robust after adjusting for risk and controlling for fund attributes, such as fund flows and turnover.

Keywords: Liquidity Provision, Mutual Fund Performance, Financial Distress, Price Pressure

JEL Classification: G10, G14, G23

Suggested Citation

Zhang, Hanjiang, Asset Fire Sales, Liquidity Provision, and Mutual Fund Performance (January 30, 2010). Available at SSRN: https://ssrn.com/abstract=1573330 or http://dx.doi.org/10.2139/ssrn.1573330

Hanjiang Zhang (Contact Author)

Washington State University - Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

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