Asset Fire Sales (and Purchases) in Equity Markets

By Joshua D. Coval, Erik Stafford. 2007

1,493 citations recorded by the source corpus.

This paper examines asset fire sales, and institutional price pressure more generally, in equity markets, using market prices of mutual fund transactions caused by capital flows from 1980 to 2003. Funds experiencing large outflows (inflows) tend to decrease (increase) existing positions, which creates price pressure in the securities held in common by these funds. Forced transactions represent a significant cost of financial distress for mutual funds. We find that investors who trade against constrained mutual funds earn highly significant returns for providing liquidity when few others are willing or able. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/290538c1ab26c2c7fb912c4cba5a7af62eb2197c

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Citations in the corpus

Regulatory Pressure and Fire Sales in the Corporate Bond Market (2011, positive): “Following Coval and Stafford (2007), we identify the fundamental value ex post by documenting the systematic patterns of transaction prices over time. Evaluating fundamental values in this way is admittedly complicated by the fact that the downgrade itself contains information. That said, the pronou”
Commonality in Liquidity: A Demand-Side Explanation (2016, neutral): “…and Stoll (1972), Lakonishok, Shleifer and Vishny (1992), Grinblatt, Titman and Wermers (1995), Sias and Starks (1997), Wermers (1999), Sias (2004), Coval and Stafford (2007), Anton and Polk (2010), and Greenwood and Thesmar (2011), To test this alternative 5 See, for example, Del Guercio (1996),…”
Fire sales, indirect contagion and systemic stress testing (2017, positive): “Indeed, there is ample empirical evidence of fire sales by asset managers Coval and Stafford (2007); Jotikasthira et al.”
Are Retail Traders Compensated for Providing Liquidity (2016, neutral): “While retail investors are possibly less sophisticated than their institutional counterparts, they also face lower agency costs and liquidity constraints than institutional investors, such as mutual funds (Chevalier and Ellison, 1999; Coval and Stafford, 2007).”
Limited Arbitrage between Equity and Credit Markets (2012, neutral): “A number of papers present evidence consistent with slow-moving capital, for example, Mitchell, Pulvino, and Stafford (2002), Mitchell, Pedersen, and Pulvino (2007), Coval and Stafford (2007), and Mitchell and Pulvino (2011).”
Which Factors Matter to Investors? Evidence from Mutual Fund Flows (2016, neutral): “Examples of studies using raw returns include Bergstresser and Poterba (2002) (tax-adjusted performance), Coval and Stafford (2007) (fund-flow price pressure relationship), Del Guercio and Tkac (2008) (Morningstar rating changes), and Ivkovic and Weisbenner (2009) (differential sensitivity of in-…”
Where the Risks Lie: A Survey on Systemic Risk (2017, neutral): “M edical Library user on 26 N ovem ber 2018 less-informed outsiders can buy, and they ask for a lower price (see Coval and Stafford, 2007 for empirical evidence).”
Noise as Information for Illiquidity: Noise as Information for Illiquidity (2013, neutral): “Recent empirical work, such as Coval and Stafford (2007) on equity fire sales by mutual funds and Mitchell, Pedersen, and Pulvino (2007) on convertible bond arbitrage by hedge funds, provides additional empirical evidence on this link.”
Stock Price Fragility (2011, neutral): “2011), retail demand for options (Garleanu, Pedersen, and Poteshman, 2009), hedge fund demand for convertible bonds (Mitchell, Pedersen, and Pulvino, 2007)), investor demand for bonds (Greenwood and Vayanos, 2009), and mutual funds’ flow-driven demand for stocks (Coval and Stafford, 2007; Frazzini a”
Institutional investors' horizons and corporate employment decisions (2020, neutral): “The idea for using our first instrument, MFFlow, follows from Coval and Stafford (2007) and Edmans, Goldstein, and Jiang (2012), who show that, when a mutual fund experiences large”