Bond Price Fragility and the Structure of the Mutual Fund Industry

Authors

Mariassunta Giannetti, Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of FinanceFollow
Chotibhak Jotikasthira, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

3-25-2024

Abstract

We conjecture that mutual funds with large shares of outstanding bond issues are more inclined to internalize the negative price spillovers of fire sales and thus sell their holdings in those issues, to a lower extent, when they experience redemptions. We provide evidence consistent with this conjecture and further show that ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit variation in negative spillovers arising from the Fed’s SMCCF to confirm the economic mechanism and explore our findings’ implications for fund performance and fire-sale spillovers to other funds.

Document Type

Article

Keywords

Bonds, Mutual Funds, Fire Sales, Fed, Corporate Quantitative Easing, COVID-19 Pandemic, Secondary Market Corporate Credit Facility (SMCCF)

Disciplines

Finance

DOI

10.2139/ssrn.3963161

Source

SMU Cox: Finance (Topic)

Language

English