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Cross-trading and liquidity management: Evidence from municipal bond funds

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  • Wang, Z. Jay
  • Yang, Jingyun

Abstract

The high flow-performance sensitivity of open-end municipal bond funds motivates fund managers to actively manage funding liquidity risk and reduce the costs of flow-driven transactions. We show that fund families use closed-end funds to provide liquidity to distressed open-end funds by coordinating cross-trading through the internal markets. Larger national funds, funds with lower cash holdings, and fund families with more flexible agency cross-trading policies engage more in liquidity-driven cross-trading. Such cross-trading improves the performance of open-end funds receiving the liquidity provision. Consistent with cross-fund subsidization and family-value maximization, fund families tend to engage low-value closed-end funds in cross-trading for liquidity management.

Suggested Citation

  • Wang, Z. Jay & Yang, Jingyun, 2021. "Cross-trading and liquidity management: Evidence from municipal bond funds," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000718
    DOI: 10.1016/j.pacfin.2021.101564
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