Co-Insurance in Mutual Fund Families

  • Goncalves-Pinto L
  • Schmidt B
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Abstract

We show that fire sales by distressed funds are systematically offset by purchases of other funds in the same family. Our results suggest that these off-exchange trades are mainly the outcome of coordinated strategies at the fund manager level. This type of co-insurance is more likely when (i) there is reciprocity in repeated interactions, (ii) the same manager oversees the funds on both sides of the transaction, and (iii) the distressed fund holds more illiquid assets. Overall, co-insurance diminishes the price impact of widespread selling by distressed funds, and helps illiquid funds pay a lower cost of distress.

Author-supplied keywords

  • Asset Fire Sales
  • Co-Insurance
  • G11
  • G23
  • G30
  • G32
  • Implicit Contracts
  • Internal Capital Markets
  • Managerial Incentives
  • Mutual Fund Families
  • Price Impact
  • Stock Liquidity

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Authors

  • Luis Goncalves-Pinto

  • Breno Schmidt

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