Do Fire Sales Create Externalities?
60 Pages Posted: 13 Oct 2017 Last revised: 24 Sep 2018
Date Written: September 10, 2018
We develop three novel measures of how much of the price impact of their trading different mutual funds internalize. We show that mutual funds that internalize more of their price impact hold larger cash buffers and use these buffers more aggressively to accommodate inflows and outflows. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results provide evidence of meaningful fire sale externalities in the mutual fund industry.
Keywords: fire sales, mutual funds, liquidity management, externalities
JEL Classification: G11, G23, G28
Suggested Citation: Suggested Citation