Identifying the Price Impact of Fire Sales Using High-Frequency Surprise Mutual Fund Flows

Abstract

I propose a new method to isolate a plausibly exogenous component of mutual fund flows in order to estimate the price impact of fire sales. The method addresses a potential reverse causality problem: instead of mutual fund outflows inducing fire sales, which drive down prices, poor stock returns reduce mutual fund returns, which in turn trigger outflows. The solution is to construct a new instrument from high-frequency surprise flows. Using surprise flows to reexamine important findings in the literature, I find equity markets are deeper and less distortive than suggested.

Keywords: Mutual Fund Flows, Fire Sales, Price Pressure, Market Feedback Effects

JEL Classification: G12, G23, G31