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Towards a Macroprudential Framework for Investment Funds: Swing Pricing and Investor Redemptions

Author

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  • Ulf Lewrick

    (Bank for International Settlements, University of Basel)

  • Jochen Schanz

    (European Investment Bank)

Abstract

How effective are available policy tools in managing systemic liquidity risks in the mutual fund industry? We assess one such tool—swing pricing—which allows funds to adjust their settlement price in response to large flows. A global game guides our empirical analysis. Consistent with its predictions, we show that during normal market conditions swing pricing dampens outflows in reaction to weak fund performance by mitigating investor first-mover advantages. Yet during episodes of market stress, swing pricing fails to contain redemption pressures despite supporting fund returns. This calls for adjusting swing pricing rules to achieve macroprudential objectives.

Suggested Citation

  • Ulf Lewrick & Jochen Schanz, 2023. "Towards a Macroprudential Framework for Investment Funds: Swing Pricing and Investor Redemptions," International Journal of Central Banking, International Journal of Central Banking, vol. 19(3), pages 229-267, August.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:3:a:6
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    References listed on IDEAS

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    1. Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2023. "Burned by leverage? Flows and fragility in bond mutual funds," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 354-380.
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    3. O'Hara, Maureen & Zhou, Xing (Alex), 2021. "Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 142(1), pages 46-68.
    4. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2012. "Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises," Journal of Financial Economics, Elsevier, vol. 105(1), pages 18-36.
    5. Sergey Chernenko & Adi Sunderam, 2016. "Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds," NBER Working Papers 22391, National Bureau of Economic Research, Inc.
    6. Ben-Rephael, Azi, 2017. "Flight-to-liquidity, market uncertainty, and the actions of mutual fund investors," Journal of Financial Intermediation, Elsevier, vol. 31(C), pages 30-44.
    7. Ulf Lewrick & Jochen Schanz, 2017. "Liquidity risk in markets with trading frictions: What can swing pricing achieve?," BIS Working Papers 663, Bank for International Settlements.
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    Cited by:

    1. Dekker, Lennart & Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2024. "Liquidity buffers and open-end investment funds: Containing outflows or reducing fire sales?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    2. Dekker, Lennart, 2024. "Essays on asset liquidity and investment funds," Other publications TiSEM 5fc9bf77-84e7-4a36-9e3a-1, Tilburg University, School of Economics and Management.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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