Corporate bond mutual funds and asset fire sales

Jaewon Choi, Saeid Hoseinzade, Sean Seunghun Shin, Hassan Tehranian

Research output: Contribution to journalArticlepeer-review

Abstract

Corporate bond mutual funds engage in liquidity transformation, raising concerns among academics and policy makers that large redemptions will lead to asset fire sales. We find little evidence, however, that bond fund redemptions drive fire sale price pressure after controlling for time-varying issuer-level information that could also affect funds’ trading decisions, using a novel identification strategy that exploits same-issuer bonds held by funds with differing outflows. We attribute our findings, which contrast with those found for equity funds, to funds’ liquidity management strategies. Bond funds maintain significant liquidity cushions and selectively trade liquid assets, allowing them to absorb investor redemption risk without excessively liquidating corporate bonds, even during the 2008 financial crisis.

Original languageEnglish (US)
Pages (from-to)432-457
Number of pages26
JournalJournal of Financial Economics
Volume138
Issue number2
DOIs
StatePublished - Nov 2020

Keywords

  • Asset fire sales
  • Corporate bond mutual funds
  • Liquidity management

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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