Swing Pricing and Fragility in Open-End Mutual Funds

63 Pages Posted: 7 Oct 2019

See all articles by Dunhong Jin

Dunhong Jin

The University of Hong Kong - Faculty of Business and Economics; University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Bige Kahraman

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR)

Felix Suntheim

International Monetary Fund (IMF) - Monetary and Capital Markets Department

Multiple version iconThere are 3 versions of this paper

Date Written: August 2019

Abstract

How to prevent runs on 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 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 redemptions during stress periods. The stabilizing effect is internalized particularly by institutional investors and investors with longer investment horizons. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.

Keywords: fragility, fund runs, liquidity mismatch, strategic complementarity, swing pricing

JEL Classification: G10, G2, G23

Suggested Citation

Jin, Dunhong and Kacperczyk, Marcin T. and Kahraman, Bige and Suntheim, Felix, Swing Pricing and Fragility in Open-End Mutual Funds (August 2019). CEPR Discussion Paper No. DP13929, Available at SSRN: https://ssrn.com/abstract=3464448

Dunhong Jin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bige Kahraman

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Felix Suntheim

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States

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