Learning from Noise? Price and Liquidity Spillovers Around Mutual Fund Fire Sales
77 Pages Posted: 4 Jun 2018
Date Written: April 12, 2018
We study the extent of cross-asset learning in financial markets by examining spillover effects 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 from Prices, Fire Sales, Liquidity
JEL Classification: G10, G11, G14
Suggested Citation: Suggested Citation