Dynamic Liquidity Management by Corporate Bond Mutual Funds

42 Pages Posted: 8 May 2016 Last revised: 30 Oct 2017

Hao Jiang

Michigan State University

Dan Li

Federal Reserve Board

Ashley Wang

Federal Reserve Board

Date Written: October 2017

Abstract

Corporate bond mutual funds tend to hold illiquid assets but provide liquid claims to their investors. How do they manage liquidity to meet investor redemptions? We show that, during tranquil market conditions, these funds tend to reduce liquid asset holdings such as cash and government bonds to meet investor redemptions, temporarily increasing their relative exposures to illiquid asset classes. During periods with heightened aggregate uncertainty, however, they tend to scale down their liquid and illiquid asset proportionally, thereby preserving the liquidity of their portfolios. This fund-level dynamic management of liquidity appears to impact the broad financial market: flows-induced trades in corporate bonds by these funds during high-uncertainty periods generate price pressures, which precede strong return reversals.

Keywords: Liquidity, Mutual funds, Asset Managers, Corporate Bond Funds, Run risks

JEL Classification: G10, G23

Suggested Citation

Jiang, Hao and Li, Dan and Wang, Ashley, Dynamic Liquidity Management by Corporate Bond Mutual Funds (October 2017). Available at SSRN: https://ssrn.com/abstract=2776829 or http://dx.doi.org/10.2139/ssrn.2776829

Hao Jiang

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Dan Li (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Ashley Wang

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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