Swing Pricing and Fragility in Open-End Mutual Funds

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 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: Asset management companies, Liquidity risk management, Mutual funds, Financial crises, Economic stabilization, liquidity mismatch, fund runs, fragility, swing pricing, strategic complementarity, WP, illiquidity, indicator variable, open-end, Inst, fund performance

JEL Classification: G2, G28, G01, G23, E01, E52, G12, E63, G21