Corporate Bond Mutual Funds and Asset Fire Sales

59 Pages Posted: 14 Feb 2016 Last revised: 15 Sep 2019

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Saeid Hoseinzade

Suffolk University - Department of Finance

Sean Seunghun Shin

Aalto University School of Business - Department of Finance

Hassan Tehranian

Boston College - Department of Finance

Date Written: September 9, 2019

Abstract

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

Choi, Jaewon and Hoseinzade, Saeid and Shin, Seunghun and Tehranian, Hassan, Corporate Bond Mutual Funds and Asset Fire Sales (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=2731844 or http://dx.doi.org/10.2139/ssrn.2731844

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Saeid Hoseinzade

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States

HOME PAGE: http://www.suffolk.edu/business/faculty/66494.php

Seunghun Shin

Aalto University School of Business - Department of Finance ( email )

Finland

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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