Swing Pricing Calibration

28 Pages Posted: 5 Dec 2022

See all articles by Kenechukwu Anadu

Kenechukwu Anadu

Federal Reserve Banks - Federal Reserve Bank of Boston

Victoria Liu

Federal Reserve Banks - Federal Reserve Bank of Boston

Lina Lu

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: November 15, 2022

Abstract

Calibrating a key component of swing pricing, the swing factor, is difficult, particularly for mutual funds (MFs) that invest substantially in thinly traded debt. We propose a novel way to estimate swing factors by exploiting the structural similarities and differences between MFs and exchange-traded funds (ETFs) with similar underlying portfolios. Our MF liquidity cost is derived as the difference between an ETF’s share price and the value of its underlying assets, conditioned on MF net flows and other factors. We find statistical evidence of substantial ETF discounts associated with MF net outflows during periods of stress; the magnitude of corresponding discounts increases with larger MF net outflows. Thus, our proxy for liquidity costs, ETF discounts, is strongly correlated with MF net outflows during stress, and therefore can be used to approximate MF swing factors. Although we focus on swing pricing, our methodology can also be useful in calibrating other economically equivalent mechanisms, such as redemption fees.

Keywords: Swing pricing, runs, mutual funds, liquidity and redemption risks

JEL Classification: G10, G23, G28

Suggested Citation

Anadu, Kenechukwu and Liu, Victoria and Lu, Lina, Swing Pricing Calibration (November 15, 2022). Available at SSRN: https://ssrn.com/abstract=4278016 or http://dx.doi.org/10.2139/ssrn.4278016

Kenechukwu Anadu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Victoria Liu

Federal Reserve Banks - Federal Reserve Bank of Boston

Lina Lu

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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