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  • March 2020
  • Article
  • Journal of Financial Economics

Do Fire Sales Create Externalities?

By: Sergey Chernenko and Adi Sunderam
  • Format:Print
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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.

Keywords

Fire Sales; Externalities; Investment Funds; Price; Financial Liquidity; Management

Citation

Chernenko, Sergey, and Adi Sunderam. "Do Fire Sales Create Externalities?" Journal of Financial Economics 135, no. 3 (March 2020): 602–628.
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About The Author

Adi Sunderam

Finance
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More from the Authors
  • Shared Models in Networks, Organizations, and Groups By: Joshua Schwartzstein and Adi Sunderam
  • Segmented Arbitrage By: Emil Siriwardane, Adi Sunderam and Jonathan L. Wallen
  • Perceptions about Monetary Policy By: Michael D. Bauer, Carolin Pflueger and Adi Sunderam
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