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Reducing liquidity mismatch in open-ended funds: a cost-benefit analysis

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  • King, Benjamin

    (Bank of England)

  • Semark, James

    (Bank of England)

Abstract

Macroprudential authorities increasingly find themselves needing to assess, and act on, risks from outside the traditional banking system. How should they think about the costs and benefits of these actions? In this paper we present an approach to cost-benefit analysis for one topical issue related to non-banks – liquidity mismatch in open-ended funds (OEFs). In particular, we analyse the benefits and costs of more extensive use of swing pricing by UK corporate bond OEFs. Using several models, we quantify the impact of liquidity mismatch and swing pricing on corporate bond spreads and expected GDP growth. We estimate that greater use of swing pricing could reduce amplification of investment grade corporate bond spreads by around 8%, and improve the distribution of GDP growth. We discuss qualitatively the impact of swing pricing on fund liquidity buffers, and the possible costs of swing pricing. We conclude that there are likely to be financial stability benefits from more extensive use of swing pricing by UK corporate bond OEFs.

Suggested Citation

  • King, Benjamin & Semark, James, 2022. "Reducing liquidity mismatch in open-ended funds: a cost-benefit analysis," Bank of England working papers 975, Bank of England.
    • Handle: RePEc:boe:boeewp:0975
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    References listed on IDEAS

    as
    1. Stephen G. Cecchetti, 2008. "Measuring the Macroeconomic Risks Posed by Asset Price Booms," NBER Chapters, in: Asset Prices and Monetary Policy, pages 9-43, National Bureau of Economic Research, Inc.
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    6. Aikman, David & Bridges, Jonathan & Hacioglu Hoke, Sinem & O’Neill, Cian & Raja, Akash, 2019. "Credit, capital and crises: a GDP-at-Risk approach," Bank of England working papers 824, Bank of England, revised 18 Oct 2019.
    7. Brooke, Martin & Bush, Oliver & Edwards, Robert & Ellis, Jas & Francis, Bill & Harimohan, Rashmi & Neiss, Katharine & Siegert, Caspar, 2015. "Financial Stability Paper No. 35: Measuring the macroeconomic costs and benefits of higher UK bank capital requirements -," Bank of England Financial Stability Papers 35, Bank of England.
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    Cited by:

    1. Dunne, Peter & Emter, Lorenz & Fecht, Falko & Giuliana, Raffaele & Peia, Oana, 2023. "Financial fragility in open-ended mutual funds: the role of liquidity management tools," ESRB Working Paper Series 140, European Systemic Risk Board.

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    More about this item

    Keywords

    Cost-benefit analysis; mutual funds; swing pricing; corporate bonds;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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

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