Swing Pricing and Fragility in Open-end Mutual Funds
71 Pages Posted: 8 Nov 2018 Last revised: 7 Jan 2021
Date Written: January 1, 2021
How to avert fragility in open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor-level transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces outflows during market stress. Swing pricing also reduces concavity in the flow-performance relationship and dilution in fund performance.
Keywords: liquidity mismatch; open-end mutual funds; fragility; swing pricing; strategic complementarity
JEL Classification: G01; G23
Suggested Citation: Suggested Citation