Working Paper: NBER ID: w25104
Authors: Sergey Chernenko; Adi Sunderam
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; mutual funds; externalities; financial stability
JEL Codes: G11; G12; G18; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mutual funds that internalize more of their price impact (G23) | Manage cash buffers more aggressively (E63) |
| High internalization funds (G23) | Cash-to-assets ratios increase when faced with inflows (G32) |
| High internalization funds (G23) | Lower realized volatility in stocks held (G17) |
| Flows into high internalization funds (F21) | Smaller spillover effects on other funds (G19) |
| High internalization funds (G23) | Larger cash buffers (E51) |
| Internalization (F02) | Cash usage to manage inflows and outflows (E50) |