Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245992 
Authors: 
Year of Publication: 
2021
Series/Report no.: 
Danmarks Nationalbank Working Papers No. 171
Publisher: 
Danmarks Nationalbank, Copenhagen
Abstract: 
I analyze the effects of liquidity risk regulation in a model of investors, mutual funds, and the underlying asset market. Investor redemptions lead mutual funds to sell assets, which may result in fire sales if market liquidity, driven by the anticipation of fire sales, is scarce. Mutual funds optimally choose to pass fire sales of their assets on to investors. Pecuniary externalities make liquidity supply to the underlying asset market inefficiently low. Regulatory policies, liquidity requirements for mutual funds, and redemption gates have adverse effects on liquidity provision to the asset market and may increase the incidence of fire sales.
Subjects: 
Financial stability
Financial regulation
Financial institutions
JEL: 
D62
G11
G23
G38
Document Type: 
Working Paper

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