Rüdiger Weber, Vienna University of Economics and Business & VGSF

The Fin­ance Brown Bag Sem­inar is held by the In­sti­tute for Fin­ance, Bank­ing and In­sur­ance (WU Vi­enna) and the Vi­enna Gradu­ate School of Fin­ance (VGSF). It serves as a present­a­tion plat­form for PhD stu­dents, fac­ulty mem­bers, and vis­it­ors. An over­view of BBS on the web­site of the In­sti­tute for Fin­ance, Bank­ing and In­sur­ance.

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Rüdi­ger Weber, Vi­enna Uni­versity of Eco­nom­ics and Busi­ness & VGSF

Money in the right hands: the price ef­fects of spe­cial­ized de­mand

We study stock li­quid­ity from a de­mand-­based per­spect­ive in the con­text of mu­tual fund fire sales. Spe­cific­ally, we show that act­ive and spe­cial­ized de­mand is a key de­termin­ant of fire sale price dis­counts. Only when there is a lack of spe­cial­ized de­mand, as prox­ied by in­flows to act­ive, spe­cial­ized funds, do we ob­serve the marked price pres­sure ef­fects re­cor­ded pre­vi­ously in the lit­er­at­ure. In­flows to pass­ive funds have little to no im­pact on price dis­counts, point­ing to the im­port­ance of act­ive man­dates for price ef­fi­ciency. Our find­ings are ro­bust to us­ing the exo­gen­ous vari­ation in fire sale pres­sure due to the 2003 late trad­ing scan­dal. As­set qual­ity and ad­verse se­lec­tion do not ex­plain the res­ult. Rather, our res­ults sug­gest inef­fi­cient al­loc­a­tions in­duced by forced sales as an ex­plan­a­tion for 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.

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