Bond Price Fragility and the Structure of the Mutual Fund Industry

78 Pages Posted: 18 Nov 2021 Last revised: 27 Mar 2024

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2024

Abstract

We conjecture that mutual funds with large shares of outstanding bond issues are more inclined to internalize the negative price spillovers of fire sales and thus sell their holdings in those issues, to a lower extent, when they experience redemptions. We provide evidence consistent with this conjecture and further show that ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit variation in negative spillovers arising from the Fed’s SMCCF to confirm the economic mechanism and explore our findings’ implications for fund performance and fire-sale spillovers to other funds.

Keywords: Bonds, Mutual Funds, Fire Sales, Fed, Corporate Quantitative Easing, COVID-19 Pandemic, Secondary Market Corporate Credit Facility (SMCCF)

JEL Classification: G12, G23, E52

Suggested Citation

Giannetti, Mariassunta and Jotikasthira, Chotibhak, Bond Price Fragility and the Structure of the Mutual Fund Industry (March 25, 2024). Review of Financial Studies, Forthcoming, Swedish House of Finance Research Paper No. 21-26, SMU Cox School of Business Research Paper No. 21-16, Available at SSRN: https://ssrn.com/abstract=3963161 or http://dx.doi.org/10.2139/ssrn.3963161

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Swedish House of Finance ( email )

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Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

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