The Dark Side of Liquid Bonds in Fire Sales

95 Pages Posted: 5 Jul 2017 Last revised: 19 May 2022

See all articles by Maria Chaderina

Maria Chaderina

University of Oregon - Lundquist College of Business

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Christoph Scheuch

wikifolio Financial Technologies AG

Date Written: May 18, 2022

Abstract

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

Chaderina, Maria and Muermann, Alexander and Scheuch, Christoph, The Dark Side of Liquid Bonds in Fire Sales (May 18, 2022). Available at SSRN: https://ssrn.com/abstract=2995544 or http://dx.doi.org/10.2139/ssrn.2995544

Maria Chaderina (Contact Author)

University of Oregon - Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Alexander Muermann

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria
+43 1 31336 4948 (Phone)
+43 1 31336 90 4948 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria

Christoph Scheuch

wikifolio Financial Technologies AG ( email )

Berggasse 31
Vienna, 1090
Austria

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