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Redemptions and asset liquidations in corporate bond funds

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  • Dötz, Niko
  • Weth, Mark

Abstract

Mutual funds' exposure to corporate bonds has brought concerns about risks arising from liquidity transformation back to the fore. With a focus on fund asset liquidity and investors, this paper explores the flow-performance relationship and the liquidity management of funds in the presence of net redemptions. We highlight the response of fund liquidity because the vulnerability to outflows is found to depend on asset liquidity and fund ownership. We construct a unique panel of German corporate bond funds by merging data on asset liquidity with information on fund ownership. First, conditional on underperformance, illiquid funds dominated by retail investors are more exposed to outflows than illiquid funds primarily owned by institutional investors. Large investors are reluctant to withdraw most likely because they internalise the fire-sale-driven loss that a withdrawal inflicts on an illiquid fund. Within institutional-oriented funds, the flow response to bad performance is only significant if fund assets are sufficiently liquid. Second, the way that fund managers liquidate their bonds to meet redemptions is found to differ across ownership structures and depends on the degree of macroeconomic uncertainty: in times of high uncertainty, managers of institutional-oriented funds sell bonds in a liquidity pecking order style, thereby preserving short-term performance. At the same time, retail-based funds do not let portfolio liquidity deteriorate - presumably to attenuate incentives for runs.

Suggested Citation

  • Dötz, Niko & Weth, Mark, 2019. "Redemptions and asset liquidations in corporate bond funds," Discussion Papers 11/2019, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:112019
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    Cited by:

    1. Thierry Roncalli & Fatma Karray-Meziou & Franc{c}ois Pan & Margaux Regnault, 2021. "Liquidity Stress Testing in Asset Management -- Part 1. Modeling the Liability Liquidity Risk," Papers 2101.02110, arXiv.org.
    2. Ulrich Bindseil & Edoardo Lanari, 2020. "Fire Sales, the LOLR and Bank Runs with Continuous Asset Liquidity," Papers 2010.11030, arXiv.org.
    3. Lanari, Edoardo, 2022. "Fire Sales, the LOLR, and Bank Runs with Continuous Asset Liquidity," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(4), pages 77-102, April.
    4. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.

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    More about this item

    Keywords

    Corporate bond funds; Ownership; Portfolio liquidity; Strategic complementarities;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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