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

50 Pages Posted: 24 Jul 2020 Last revised: 3 Aug 2020

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

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 these funds during this period, far greater than anything they experienced in past events. Large outflows were sustained over several weeks and were widespread across funds. Inspecting the role of sources of fragility, we show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows in this episode. The exposure to sectors most hurt by the COVID-19 crisis was also important. Two policy announcements by the Federal Reserve about extraordinary direct interventions in corporate-bond markets seem to have played an important role in calming down the panic and reversing the outflows.

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 (July 2020). NBER Working Paper No. w27559, Available at SSRN: https://ssrn.com/abstract=3658855

Antonio Falato (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

Itay Goldstein

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

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Ali Hortaçsu

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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