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Corporate bond mutual funds and asset fire sales

Author

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  • Choi, Jaewon
  • Hoseinzade, Saeid
  • Shin, Sean Seunghun
  • Tehranian, Hassan

Abstract

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.

Suggested Citation

  • Choi, Jaewon & Hoseinzade, Saeid & Shin, Sean Seunghun & Tehranian, Hassan, 2020. "Corporate bond mutual funds and asset fire sales," Journal of Financial Economics, Elsevier, vol. 138(2), pages 432-457.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:2:p:432-457
    DOI: 10.1016/j.jfineco.2020.05.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate bond mutual funds; Liquidity management; Asset fire sales;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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