Do Fund Flows Lead to Fire-sales and Pose Systemic Risk?

Abstract

Assessing systemic risk of mutual funds as a result of liquidity transformation is difficult because the frequency of flow and holdings data available is too low to properly isolate the price impact of redemption-driven sales of portfolio assets. Exchange-traded funds (ETFs) offer the advantage of daily observations of redemptions as well as the exact assets which might be sold in the underlying market. Exploiting this advantage, we show for extreme redemptions from individual corporate bond ETFs during normal times and stressed markets as well as for the largest aggregate redemptions from all corporate bond ETFs that the concern of systemic risk is not supported by the data. For the most extreme daily redemptions between 2009 and 2017, we find that for many bonds received in-kind for ETF shares, customer sell volumes in excess of average past daily customer sell volumes are either negative or large multiples of the maximum potential redemption implied sale of bonds. Further, we show that among the bonds with positive excess customer sell volumes, the extreme redemption implied sale of bonds relative to the standard deviations of past daily customer sell volumes was large for only very few of them. Corroborating the results, using regression analyses we find no evidence that extreme redemption implied sales of bonds led to abnormal negative price impacts in the underlying bond market. These findings imply that extreme redemption implied asset sales in the corporate bond market have not triggered wide-spread fire sales.

Keywords: Systemic Risk, Fire Sales, Corporate Bonds, Mutual Funds, ETFs

JEL Classification: G12, G20, G23