Front-Running of Mutual Fund Fire-Sales

36 Pages Posted: 4 Nov 2012 Last revised: 1 May 2014

See all articles by Teodor Dyakov

Teodor Dyakov

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Date Written: September 6, 2012

Abstract

We show that a real-time trading strategy which front-runs the anticipated forced sales by mutual funds experiencing extreme capital outflows generates an alpha of 0.5% per month during the 1990-2010 period. The abnormal return stems from selling pressure among stocks that are below the NYSE mean size and cannot be attributed to the arrival of public information. While the largest stocks also exhibit downward price pressure, their prices revert before the front-running strategy can detect it. The duration of the anticipated selling pressure has decreased from about a month in the 1990s to about two weeks in the most recent decade. Our results suggest that publicly available information of fund flows and holdings exposes mutual funds in distress to predatory trading.

Keywords: mutual funds, front-running, fire-sales, disclosure

JEL Classification: G23, G12, G17, G11

Suggested Citation

Dyakov, Teodor and Verbeek, Marno, Front-Running of Mutual Fund Fire-Sales (September 6, 2012). Journal of Banking and Finance, Vol. 37, No. 12, 2013, Available at SSRN: https://ssrn.com/abstract=2170660 or http://dx.doi.org/10.2139/ssrn.2170660

Teodor Dyakov (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 59 82197 (Phone)
+31 20 59 86020 (Fax)

HOME PAGE: http://www.teodordyakov.work

Tinbergen Institute ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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