Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets

66 Pages Posted: 21 Jul 2020 Last revised: 12 Aug 2021

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Ali Hortaçsu

University of Chicago; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 23, 2021

Abstract

In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a “bond-fund fragility channel” whereby the Fed liquidity backstop transmits to the real economy via funds.

JEL Classification: G01, G1, G23, G38

Suggested Citation

Falato, Antonio and Goldstein, Itay and Hortaçsu, Ali, Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets (April 23, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-98, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3656665 or http://dx.doi.org/10.2139/ssrn.3656665

Antonio Falato

Board of Governors of the Federal Reserve System ( email )

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Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
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Ali Hortaçsu (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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