Asset Fire Sales (and Purchases) in Equity Markets

43 Pages Posted: 21 Jun 2005 Last revised: 15 Jul 2010

See all articles by Joshua D. Coval

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Erik Stafford

Harvard Business School - Finance Unit

Date Written: May 2005

Abstract

This paper examines asset fire sales, and institutional price pressure more generally, in equity markets, using market prices of mutual fund transactions caused by capital flows from 1980 to 2003. Funds experiencing large outflows (inflows) tend to decrease (increase) existing positions, which creates price pressure in the securities held in common by these funds. Forced transactions represent a significant cost of financial distress for mutual funds. We find that investors who trade against constrained mutual funds earn highly significant returns for providing liquidity when few others are willing or able. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.

Suggested Citation

Coval, Joshua D. and Stafford, Erik, Asset Fire Sales (and Purchases) in Equity Markets (May 2005). NBER Working Paper No. w11357, Available at SSRN: https://ssrn.com/abstract=727137

Joshua D. Coval (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Erik Stafford

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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