Money in the Right Hands

95 Pages Posted: 3 Feb 2022 Last revised: 15 Dec 2022

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University - Schulich School of Business

Rüdiger Weber

WU Vienna; Vienna Graduate School of Finance (VGSF)

Date Written: December 12, 2022

Abstract

We study stock liquidity from a demand-based perspective in the context of mutual fund fire sales and index reconstitutions. We introduce a stock-level measure of specialized demand, capturing the available investment capacity of investors likely to have a high valuation for a stock and find that it determines non-fundamental price discounts. Only when specialized demand is scarce, do we observe the marked price pressure previously documented in the literature. Specialized demand does not proxy for informed trading, and neither asset quality nor adverse selection explain our results. Rather, inefficient allocations induced by fire sales lead to transiently higher discount rates and price pressure.

Keywords: Demand-based asset pricing, Mutual funds, Fire sales, Liquidity, Market efficiency

JEL Classification: G11, G12, G14, G23

Suggested Citation

Rzeźnik, Aleksandra and Weber, Rüdiger, Money in the Right Hands (December 12, 2022). Available at SSRN: https://ssrn.com/abstract=4022634 or http://dx.doi.org/10.2139/ssrn.4022634

Aleksandra Rzeźnik (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Rüdiger Weber

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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