39 Pages Posted: 9 Feb 2020
Date Written: January 11, 2020
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: Suggested Citation