Fragile Liquidity

39 Pages Posted: 9 Feb 2020

See all articles by Tim Park

Tim Park

The University of Texas at Austin

Date Written: January 11, 2020

Abstract

I study how liquidity management affects fragility, or vulnerability to fund flows, in mutual funds and their underlying assets. Using the SEC Rule on mutual fund liquidity risk management in 2016 as an exogenous shock, I show that mutual funds which mainly invest in illiquid assets shift their portfolios towards liquid assets. Using this variation, I find that higher mutual fund ownership in liquid assets may create fragility in mutual funds and their underlying assets. The regulation increases comovement among liquid assets and volatility of liquid funds' returns. However, I find little evidence of stabilized fund flows and flow-performance sensitivity. Overall, liquidity management could be costly for investors.

Keywords: mutual funds, corporate bonds, liquidity management, return comovement

JEL Classification: G11, G18, G23, G28

Suggested Citation

Park, Tim, Fragile Liquidity (January 11, 2020). Available at SSRN: https://ssrn.com/abstract=3515720 or http://dx.doi.org/10.2139/ssrn.3515720

Tim Park (Contact Author)

The University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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