Fund Flows, Liquidity, and Asset Prices

94 Pages Posted: 26 Mar 2019 Last revised: 20 Feb 2024

Date Written: January 14, 2024

Abstract

This paper shows empirically that mutual funds, facing fund flow risk and liquidity risk, significantly distort expected corporate bond returns due to their distinct asset demands as financial intermediaries. Funds actively engage in hedging by underweighting corporate bonds highly exposed to such risks, ultimately incurring substantial risk premia for fund flow betas: the co-movements of returns and, notably, liquidity costs with aggregate fund flow shocks. Using identification strategies that exploit distinctive structures in the corporate bond markets, this paper demonstrates that the unique variations of aggregate flow shocks are priced, while ruling out various alternative asset pricing channels.

Keywords: Fund flow risk; Liquidity risk; Aggregate fund flows; Corporate bonds; Cross-section; Intermediary asset pricing; Hedging demand; Liquidity management

JEL Classification: G12, G20, G23

Suggested Citation

Kim, Minsoo, Fund Flows, Liquidity, and Asset Prices (January 14, 2024). Available at SSRN: https://ssrn.com/abstract=3345940 or http://dx.doi.org/10.2139/ssrn.3345940

Minsoo Kim (Contact Author)

University of Melbourne ( email )

Melbourne
Australia

HOME PAGE: http://https://www.minsookim.net/

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