Do Fire Sales Create Externalities?

60 Pages Posted: 13 Oct 2017 Last revised: 24 Sep 2018

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Adi Sunderam

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2018

Abstract

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

Chernenko, Sergey and Sunderam, Adi, Do Fire Sales Create Externalities? (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=3051793 or http://dx.doi.org/10.2139/ssrn.3051793

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

Adi Sunderam

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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