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    Do Fire Sales Create Externalities?
    15 Nov 2018Working Paper Summaries

    Do Fire Sales Create Externalities?

    by Sergey Chernenko and Adi Sunderam
    This paper contributes to our understanding of the role of large institutional investors in securities markets, providing evidence that the structure of the mutual fund industry increases the risks of costly "fire sales."
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    Author 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: September 2018
    • HBS Working Paper Number: NBER Working Paper Series, No. 25104
    • Faculty Unit(s): Finance
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    Adi Sunderam
    Adi Sunderam
    Willard Prescott Smith Professor of Corporate Finance
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