Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

We identify fixed-income mutual funds as an important contributor to the unusually high selling pressure in liquid asset markets during the Covid-19 crisis. We show that mutual fund liquidity transformation led to pronounced investor outflows. In meeting redemptions, funds followed a pecking order by first selling their liquid assets, including Treasuries and high-quality corporate bonds, which generated the most concentrated selling pressure in these markets. The Fed's announced purchase of illiquid securities effectively stabilized mutual fund liquidity transformation and alleviated the selling pressure in liquid asset markets.

Keywords: Mutual fund, liquidity transformation, flight-to-liquidity, COVID-19

JEL Classification: G23, G28, G11

Suggested Citation: Suggested Citation

Ma, Yiming and Xiao, Kairong and Zeng, Yao, Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity (July 29, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, 2020, Available at SSRN: https://ssrn.com/abstract=3640861 or http://dx.doi.org/10.2139/ssrn.3640861