Price and Liquidity Spillovers during Fire Sale Episodes

Abstract

We study price and liquidity spillovers in U.S. stock markets around mutual fund fire sales. We find that the well-documented impact-reversal pattern for the returns of fire sale stocks (e.g., Coval and Stafford, 2007) spills over onto the stock returns of economic peers, with a magnitude that is around one fifth of the original effect. These spillovers extend to liquidity and are not explained by common funding shocks or the hedging activity of liquidity providers. We conclude that they represent information spillovers due to learning from prices, thus identifying cross-asset learning as an important driver for the commonality in returns and liquidity.

Keywords: Learning, Spillovers, Liquidity, Comovement, Rational Expectations

JEL Classification: G10, G12, G14