The Dark Side of Liquid Bonds in Fire Sales
74 Pages Posted: 5 Jul 2017 Last revised: 29 Apr 2018
Date Written: April 23, 2018
We show that in fire sales institutional investors chose to sell bonds that were trading in liquid markets before. Surprisingly, the price drops of these bonds are larger than of bonds that were trading in less liquid markets. We argue that this is because institutions fail to internalize the negative effect selling common bonds has on other market participants. After controlling for commonality of bonds, liquid bonds exhibit smaller price impacts in fire sales. Regulatory measures of systemic risk should thus take into account the portfolio overlap in liquid bonds as it exacerbates fire-sale losses.
Keywords: Fire Sales, Liquidity, Corporate Bonds, Insurance Companies
JEL Classification: G11, G12, G22, G28
Suggested Citation: Suggested Citation