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Monetary Policy and Fragility in Corporate Bond Mutual Funds

Author

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  • Kuong, John Chi-Fong
  • O'Donovan, James
  • Zhang, Jinyuan

Abstract

We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model's predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

Suggested Citation

  • Kuong, John Chi-Fong & O'Donovan, James & Zhang, Jinyuan, 2024. "Monetary Policy and Fragility in Corporate Bond Mutual Funds," CEPR Discussion Papers 19361, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19361
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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