Do Fire Sales Create Externalities?

61 Pages Posted: 1 Oct 2018 Last revised: 4 Feb 2021

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Aditya Sunderam

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: September 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.

Suggested Citation

Chernenko, Sergey and Sunderam, Aditya, Do Fire Sales Create Externalities? (September 2018). NBER Working Paper No. w25104, Available at SSRN: https://ssrn.com/abstract=3258202

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
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HOME PAGE: http://https://sites.google.com/site/chernenkosergey/

Aditya Sunderam

Harvard University ( email )

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