Corporate Bond Mutual Funds and Asset Fire Sales
59 Pages Posted: 14 Feb 2016 Last revised: 15 Sep 2019
Date Written: September 9, 2019
Corporate bond mutual funds engage in liquidity transformation, raising concerns among academics and policymakers 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 might 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 financial crisis.
Keywords: Corporate Bond Mutual Funds; Liquidity Management; Asset Fire Sales
JEL Classification: G11, G12, G14, G20, G23
Suggested Citation: Suggested Citation