Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

Ma, Yiming; Xiao, Kairong; Zeng, Yao

doi:10.2139/ssrn.3640861

Cited by 33 publications

(27 citation statements)

References 5 publications

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“… Chen, Goldstein, and Jiang (2010) , Falato et al (forthcoming) , and Goldstein, Jiang, and Ng (2017) provide theory and evidence of these forces before the recent episode. Consistent with this view, Falato, Goldstein, and Hortaçsu (2020) and Ma, Xiao, and Zeng (2020) document large redemptions from bond mutual funds during the COVID-19 crisis. Falato, Goldstein, and Hortaçsu (2020) show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows.…”

Section: What Explains the Price Movements In Debt Markets?mentioning

confidence: 65%

“…In response to a liquidity shock, it is often optimal to first sell the most liquid assets in a portfolio. Theory and evidence for this type of response abound in the literature— Moreira and Savov (2017) for shadow banks, or Chernenko and Sunderam (2016) and Ma, Xiao, and Zeng (2020) for mutual funds, are recent examples—and this idea structures liquidity regulation in practice. Our evidence is very much in line with this view: the assets typically viewed as more safe and liquid experienced the largest price dislocations.…”

Section: What Explains the Price Movements In Debt Markets?mentioning

confidence: 99%

“…Several papers focus specifically on liquidity in bond markets in the COVID-19 crisis as well, including O’Hara and Zhou (2020) , Kargar et al (2020) , Fleming and Ruela (2020) , Schrimpf, Shin, and Sushko (2020) , and Boyarchenko, Kovner, and Shachar (2020) . Falato, Goldstein, and Hortaçsu (2020) and Ma, Xiao, and Zeng (2020) focus instead on the sources and implications of large redemption by bond mutual funds. Vissing-Jorgensen (2020) discusses the case for corporate bond purchases in the current crisis.…”

mentioning

confidence: 99%

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When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Haddad

Moreira

Muir

2021

The Review of Financial Studies

237

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We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. Investment-grade corporate bonds traded at a discount to credit default swaps; exchange-traded funds traded at a discount to net asset value, more so for safer bonds. The Federal Reserve’s announcement of corporate bond purchases caused these dislocations to disappear and prices to recover. These facts inform potential theories of the disruption. The best explanation is an acute liquidity need for specific bond investors, such as mutual funds, leading them to liquidate large positions.

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Section: What Explains the Price Movements In Debt Markets?mentioning

confidence: 65%

Section: What Explains the Price Movements In Debt Markets?mentioning

confidence: 99%

mentioning

confidence: 99%

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When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Haddad

Moreira

Muir

2021

The Review of Financial Studies

237

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show abstract

“…In the corporate bond market, Falato, Goldstein, and Hortaçsu (2020) focus on the effects of the pandemic on outflows from bond mutual funds, and the role that the Fed's corporate credit facilities played in reversing these outflows. Ma, Xiao, and Zeng (2020) also explore outflows in fixed-income mutual funds, including those that invest in corporate bonds and Treasuries. They derive a pecking order theory of liquidation, which helps to explain why selling pressure was strongest in the most liquid sectors of these markets.…”

Section: Related Literaturementioning

confidence: 99%

Corporate Bond Liquidity During the COVID-19 Crisis

Kargar

Lester

Lindsay

et al. 2020

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We study liquidity conditions in the corporate bond market during the COVID-19 pandemic, and the effects of the unprecedented interventions by the Federal Reserve. We find that, at the height of the crisis, liquidity conditions deteriorated substantially, as dealers appeared unwilling to absorb corporate debt onto their balance sheets. In particular, we document that the cost of riskyprincipal trades increased by a factor of five, forcing traders to shift to slower, agency trades. The announcements of the Federal Reserve's interventions coincided with substantial improvements in trading conditions: dealers began to "lean against the wind" and bid-ask spreads declined. To study the causal impact of the interventions on market liquidity, we exploit eligibility requirements for bonds to be purchased through the Fed's corporate credit facilities. We find that, immediately after the facilities were announced, trading costs for eligible bonds improved significantly while those for ineligible bonds did not. Later, when the facilities were expanded, liquidity conditions improved for a wide range of bonds. We develop a simple theoretical framework to interpret our findings, and to estimate how the COVID-19 shock and subsequent interventions affected consumer surplus and dealer profits.

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“…The corporate bond market-typically the more liquid investment grade corporate market -was particularly impaired in part because of mutual fund flows. See Gilchrist et al (2020), , and Ma et al (2020).…”

Section: Monetary Policymentioning

confidence: 99%

Central bank responses to COVID-19

Mosser

2020

Bus Econ

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Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

Cited by 33 publications

References 5 publications

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

Corporate Bond Liquidity During the COVID-19 Crisis

Central bank responses to COVID-19

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