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Do Fire Sales Create Externalities?

Author

Listed:
  • Sergey Chernenko
  • Adi Sunderam
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.

Suggested Citation

  • Sergey Chernenko & Adi Sunderam, 2018. "Do Fire Sales Create Externalities?," NBER Working Papers 25104, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25104
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    References listed on IDEAS

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    Cited by:

    1. Bruno Biais & Florian Heider & Marie Hoerova, 2021. "Variation Margins, Fire Sales, and Information-constrained Optimality [Leverage, Moral Hazard, and Liquidity]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2654-2686.
    2. Dunhong Jin & Marcin Kacperczyk & Bige Kahraman & Felix Suntheim, 2022. "Swing Pricing and Fragility in Open-End Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 35(1), pages 1-50.
    3. Shui-Tang Wu, Gabriel & Ho-Yeung Wong, Joe & Pak-Wing Fong, Tom, 2024. "Does swing pricing reduce investment funds’ liquidity risk in times of market stress? – Evidence from the March-2020 episode," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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