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Session Overview
FIIE-13: Fire-Sales and Panic
Friday, 25/Aug/2017:
1:30pm - 3:00pm

Session Chair: Oren Sussman, University of Oxford
Location: O135

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Fire-Sale Spillovers in Debt Markets

Antonio Falato1, Ali Hortaçsu2, Dan Li1, Chae Hee Shin1

1Federal Reserve Board; 2University of Chicago

Discussant: Dong Beom Choi (Federal Reserve Bank of New York)

We assess fire-sale spillovers empirically using a new approach to measure network linkages across financial institutions and rich micro data for the universe of open-end fixed-income mutual funds. We find evidence that flows are interdependent across funds with asset class overlap, consistent with the hypothesis that one fund’s redemptions may spill-over on to those of other funds by leading to distressed sales that adversely impact other funds’ performance. We use several strategies to identify the causal link between any given fund’s flows and those of its peers, including a regression discontinuity (RD) design that exploits sharp changes in peer flows around Morningstar 5-star ratings. The source of identification of our RD approach is quasi-random variation in peer flows around the arbitrary performance cutoffs used by Morningstar to assign their 5-star ratings, which is plausibly unrelated to changes in common industry fundamentals. Consistent with a fire-sale mechanism, not just fund flows, but also fund performance and liquidity, as well as the pricing of corporate bonds sold by funds under peer pressure, are adversely affected. Our approach yields simple measures of vulnerability of a fund family to system-wide flow pressures, which can be used for policy evaluation of alternative financial stability tools.

EFA2017-1157-FIIE-13-Falato-Fire-Sale Spillovers in Debt Markets.pdf

Fire-Sale Cascades - Evidence from the Mutual Fund Industry

Tim Adam, Laurenz Klipper

Humboldt University

Discussant: Joel Shapiro (University of Oxford)

In this paper we provide evidence for fire-sale cascades. We identify fire-sales using an exogenous shock to the borrowing costs of some levered closed-end funds. Stocks that are fire-sold by these closed-end funds temporarily fall in price by up to -15% in the selling quarter. Due to holding overlaps initially unaffected open-end funds experience significant performance deteriorations by being invested in these fire-sales stocks. As fund investors do not distinguish between the reasons for poor performance this performance deterioration results in fund outfows. Consequently, open-end funds are forced to fire-sell stocks themselves.

EFA2017-1853-FIIE-13-Adam-Fire-Sale Cascades.pdf

The Anatomy of a Banking Panic

Nagpurnanand Prabhala1, Nirupama Kulkarni2

1University of Maryland; 2Reserve Bank of India

Discussant: David Martinez-Miera (Universidad Carlos III de Madrid)

We present micro-level evidence on a widespread banking panic triggered by flight to safety by retail depositors. Private banks in India had virtually no exposure to the institutions or toxic assets of the 2008 financial crisis. Yet, these banks experienced large withdrawals due to pure panic of the retail clients. We quantify, characterize, and examine the reallocations of capital due to this panic using a granular dataset on deposits at the branch level. We show that the panic flows are local: they reallocate resources from private to state-owned banks in the same district. There is outflow of both short and long-term deposits but also maturity transformation into stable term funding in the aggregate. There is credit reallocation following the panic due to differences in lending between losing and receiving bank branches. Panics thus have real consequences: they redistribute funds and transform the structure of both assets and liabilities of banks.

EFA2017-1932-FIIE-13-Prabhala-The Anatomy of a Banking Panic.pdf

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