Asset fire sales in equity markets: Evidence from a quasi-natural experiment

In November of 2007 a fire sale of Chilean stocks was triggered by a change in the constraints that regulate pension fund portfolios. This regulatory shock provided a cleanly identified fire sale unrelated to fundamentals. Stocks with more selling pressure from pension funds lost approximately 4% in November compared to other stocks. Although the selling pressure was temporary, prices reverted only after four to six months. Pension funds initially mitigated the impact of the fire sale by selling large index stocks in which demanding liquidity was less costly. Coordination across pension funds increased during the fire sale. We find no significant evidence of real effects on firm investment in the quarters after the fire sale.