Flow-Induced Trading: Evidence from the Daily Trading of Municipal Bond Mutual Funds
62 Pages Posted: 30 Jan 2024
Date Written: January 4, 2024
We use novel data on the daily flows, trading, and cash buffers of open-end municipal bond mutual funds to study the dynamics of fund flows and trading activity. We document a much stronger reliance on cash buffers than would be suggested by monthly regressions. Although the one-month responses of sales and purchases are very similar, their dynamics are different, with sales being much quicker to respond to outflows. We show that the responsiveness of sales to outflows decreases with the level of markups and increases with aggregate outflows, even controlling for the effect of aggregate outflows on cash buffers.
Keywords: fire sales, mutual fund flows, municipal bonds, liquidity management, daily trading
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation