Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

66 Pages Posted: 2 Jul 2020 Last revised: 1 Apr 2021

See all articles by Yiming Ma

Yiming Ma

Columbia University - Columbia Business School

Kairong Xiao

Columbia University - Columbia Business School

Yao Zeng

University of Pennsylvania - The Wharton School

Date Written: July 29, 2020

Abstract

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

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

Yiming Ma

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Kairong Xiao (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Yao Zeng

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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