Corporate bond mutual funds engage in liquidity transformation, raising concerns among academics and policy makers that large redemptions will lead to asset fire sales. We find little evidence, however, that bond fund redemptions drive fire sale price pressure after controlling for time-varying issuer-level information that could also affect funds’ trading decisions, using a novel identification strategy that exploits same-issuer bonds held by funds with differing outflows. We attribute our findings, which contrast with those found for equity funds, to funds’ liquidity management strategies. Bond funds maintain significant liquidity cushions and selectively trade liquid assets, allowing them to absorb investor redemption risk without excessively liquidating corporate bonds, even during the 2008 financial crisis.
Bibliographical noteFunding Information:
This paper combines “Liquidity Sensitive Trading and Corporate Bond Fund Fire Sales” by Jaewon Choi and Sean Seunghun Shin and “Corporate Bond Mutual Funds and Asset Fire Sales” by Saeid Hoseinzade and Hassan Tehranian. We thank Pierluigi Balduzzi, Jack Bao, Elizabeth Berger, Gjergji Cici, Caitlin Dannhauser, Jens Dick-Nielson, Ali Ebrahimnejad, Wayne Ferson, Mark Flannery, Jean Helwege, Edith Hotchkiss, Mohammad Imanlou, Inmoo Lee, Pedro Matos, Mahdi Mohseni, Jeffrey Pontiff, Jonathan Reuter, Ronnie Sadka, David Schmacher, Yao Shen, Tray Spilker, Philip Strahan, Kai Wu, Alex Zhou, and seminar participants at the Bank of Finland, Boston College, the 2016 China International Conference in Finance, the 2018 Financial Intermediation Research Society, the 2016 Fixed Income and Financial Institutions conference, the 2016 Financial Management Association, the 2017 HEC Montréal Finance Workshop, the 2016 SEC Conference on the Financial Market Regulation, Suffolk University, the 2017 Young Scholars Nordic Finance Workshop, and the 2018 Zeuthen Workshop for helpful comments and suggestions. All errors are our own.
© 2020 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Strategy and Management