Money in the Right Hands

Aleksandra Rzeznik, Rüdiger Weber

Publication: Working/Discussion PaperWorking Paper/Preprint


We study stock liquidity from a demand-based perspective in the context of mutual fund fire sales. We construct a stock-level measure of what we call specialized demand, the available investment capacity of investors likely to have a high valuation for that stock and find that it is a key determinant of fire sale price discounts. Only when specialized demand is scarce, we observe the marked price pressure effects recorded previously in the literature. Our findings are robust to using the exogenous variation in fire sale pressure due to the 2003 late trading scandal. Importantly, specialized demand is not a proxy for informed trading, i.e., asset quality and adverse selection do not explain our results. Rather, inefficient allocations induced by forced sales lead to transiently higher discount rates and price pressure. This implies that fire-sale pressure in the absence of active specialized demand can be interpreted as a non-fundamental shock to prices. We find similar results when studying index reconstitutions as another instance of non-fundamental price pressure.
Translated title of the contributionMoney in the Right Hands
Original languageEnglish
Number of pages87
Publication statusPublished - 27 Jan 2022

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