Original title: Residual Supply and the Price of Risk Absorption
Ziyao Wang · May 2026
When investment funds face cash withdrawals, they often must sell stocks quickly. If typical buyers are not ready, other investors step in, buy those shares, and hold them until markets settle. These temporary buyers risk losing money, so they demand a payoff. The authors studied what return these buyers require. They built a mathematical model and tracked United States mutual fund flows from 2003 to 2024. They found that forced selling pushes stock prices down right away, but leads to positive returns over the next one to six months. This extra return roughly doubles when overall market buying capacity is tight. It is largest in stocks with few investors and limited trading capacity, rather than coming from simple price bounces.
Imagine a friend is moving away and needs to sell their furniture quickly, so they offer it at a low price. Normally, many people would come to buy, but if only one person has the space and cash to take everything, that person will only do so if they expect to make a profit by reselling later. In this paper, the moving friend is a fund forced to sell, the many potential buyers are natural investors, and the single buyer is the limited-capital investor who absorbs the residual supply. The profit they demand is the premium that doubles when the market is full of similar fire sales.
This matters for anyone who invests in mutual funds or manages them. When funds sell under pressure, the investors who step in to buy require a premium that varies with market conditions. This premium doubles when the overall market has less capacity to absorb such sales, and it is highest for stocks with few natural buyers. Understanding this helps predict price drops and subsequent recoveries, and it reveals a hidden cost of liquidity provision.
The abstract doesn't explicitly state limitations, but it measures only one observable component of residual supply, so the full premium may be larger. The analysis is limited to U.S. mutual funds from 2003-2024, so results may not generalize. The model assumes continuous-time market clearing, which may not hold in practice. The paper does not establish causality; the pattern could be consistent with other explanations, though it rules out mechanical return reversal.
Ask anything about this paper. Answers come from its abstract, and say so when the abstract doesn't cover your question.
Residual Supply and the Price of Risk Absorption — Ziyao Wang
Abstract licence: CC0
Explanation generated by Synthesis from the abstract — it is not the original paper. This is a preprint, so it hasn't necessarily been peer reviewed.