Redemption Risk and Cash Hoarding by Asset Managers

47 Pages Posted: 1 Feb 2017

See all articles by Stephen Morris

Stephen Morris

Princeton University - Department of Economics

Ilhyock Shim

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: January 2017

Abstract

Open-end mutual funds face redemptions by investors, but the sale of the underlying assets depends on the portfolio decision of asset managers. If asset managers use their cash holding as a buffer to meet redemptions, they can mitigate fire sales of the underlying asset. If they hoard cash in anticipation of redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of global bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display a greater tendency toward cash hoarding.

Keywords: asset manager, bond market liquidity, cash hoarding, global game, investor redemption, strategic complementarity

JEL Classification: E52, G11, G15, G23

Suggested Citation

Morris, Stephen Edward and Shim, Ilhyock and Shin, Hyun Song, Redemption Risk and Cash Hoarding by Asset Managers (January 2017). BIS Working Paper No. 608. Available at SSRN: https://ssrn.com/abstract=2909451

Stephen Edward Morris (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Ilhyock Shim

Bank for International Settlements (BIS) ( email )

78F, Two International Finance Centre
8 Finance Street, Central
Hong Kong, n/a n/a
Hong Kong

HOME PAGE: http://www.bis.org/author/ilhyock_shim.htm

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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