Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity. (9th February 2022)

• Record Type: Journal Article
• Authors: Ma, Yiming; Xiao, Kairong; Zeng, Yao
• Editors: Koijen, Ralph
• Is Part Of: Review of financial studies. Volume 35:Number 10(2022)
• Page Start: 4674
• Page End: 4711
• Publication Date: 2022-02-09
• Subjects: E50 -- G01 -- G12 -- G23; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhac007
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: We identify fixed-income mutual funds as an important contributor to the unusually high selling pressure in liquid asset markets during the COVID-19 crisis. We show that mutual funds experienced pronounced investor outflows amplified by their liquidity transformation. In meeting redemptions, funds followed a pecking order by first selling their liquid assets, including Treasuries and high-quality corporate bonds, which generated the most concentrated selling pressure in these markets. Overall, the estimated price impact of mutual funds was sizable at a third of the increase in Treasury yields and a quarter of the increase in corporate bond yields during the COVID-19 crisis.