The information in asset fire sales

The information in asset fire sales

Asset prices remain depressed for several years following mutual fund fire sales. We show that this price pressure is partly due to asymmetric information which leads to an adverse selection problem for arbitrageurs. After a flow shock, fund managers do not scale down their portfolio, rather, they cho...

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Bibliographic Details
Main Authors: HUANG, Sheng, RINGGENBERG, Matthew, ZHANG, Zhe
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2019
Subjects:
Adverse selection
asymmetric information
fire sales
information economics
institutional investors
slow moving capital
Finance
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5894
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6893/viewcontent/Informed_Fire_Sale_Jan_2022.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:Asset prices remain depressed for several years following mutual fund fire sales. We show that this price pressure is partly due to asymmetric information which leads to an adverse selection problem for arbitrageurs. After a flow shock, fund managers do not scale down their portfolio, rather, they choose to sell a subset of low-quality stocks that subsequently underperform. In other words, fund managers have stock selling ability. Our findings suggest an explanation for the tendency of asset prices to remain depressed following fire sales: information asymmetries make it difficult for arbitrageurs to disentangle pure price pressure from negative information.

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