NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Do Fire Sales Create Externalities?

Sergey Chernenko, Adi Sunderam

NBER Working Paper No. 25104
Issued in September 2018
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w25104

 
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