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Do fire sales create externalities?

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  • Chernenko, Sergey
  • Sunderam, Adi

Abstract

We develop three novel measures of the incentives of equity mutual funds to internalize the price impact of their trading. We show that mutual funds with stronger incentives to internalize their price impact accommodate inflows and outflows by adjusting their cash buffers instead of trading in portfolio securities. 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 equity mutual fund industry.

Suggested Citation

  • Chernenko, Sergey & Sunderam, Adi, 2020. "Do fire sales create externalities?," Journal of Financial Economics, Elsevier, vol. 135(3), pages 602-628.
    • Handle: RePEc:eee:jfinec:v:135:y:2020:i:3:p:602-628
    DOI: 10.1016/j.jfineco.2019.08.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Fire sales; Liquidity management; Mutual funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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