Bank Debt, Mutual Fund Equity, and Swing Pricing in Liquidity Provision

74 Pages Posted: 5 Dec 2019 Last revised: 16 Dec 2022

See all articles by Yiming Ma

Yiming Ma

Columbia University - Columbia Business School

Kairong Xiao

Columbia University - Columbia Business School

Yao Zeng

University of Pennsylvania - The Wharton School

Date Written: December 16, 2022

Abstract

Liquidity provision is often attributed to debt-issuing intermediaries like banks. We show that mutual funds issuing demandable equity also provide liquidity by insuring against idiosyncratic liquidity shocks. Quantitatively, the average bond fund provides 5.08 cents of liquidity per dollar, which is economically significant at one-fifth of that of banks. We find that fund liquidity provision is further improved by 6.7% when equity values incorporate the liquidation cost from redemptions, as in swing pricing. This is because swing pricing increases funds’ capacity for holding illiquid assets without inducing panic runs.

Keywords: Swing Pricing, Mutual Funds, Liquidity Provision, Flows, Runs

JEL Classification: G21, G23

Suggested Citation

Ma, Yiming and Xiao, Kairong and Zeng, Yao, Bank Debt, Mutual Fund Equity, and Swing Pricing in Liquidity Provision (December 16, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3489673 or http://dx.doi.org/10.2139/ssrn.3489673

Yiming Ma

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Kairong Xiao

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Yao Zeng (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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