The Consequences of Fund-level Liquidity Requirements

Financial Fragility in Open-ended Mutual Funds: The Role of Liquidity Management Tools

“…We consider two alternative definitions. First, we follow Chakraborty et al (2022) and include funds that hold at least 15% of their portfolio in corporate bonds. This results in a sample of 606 bond and mixed funds.…”

“…For example, Morris et al (2017) show that bond funds do not necessarily reduce cash holding to meet investor outflows, but would very often sell other less liquid assets. This cash hoarding behavior is more pronounced among less liquid funds and can amplify fire sales during periods of market distress (see also Chakraborty et al 2022, Jiang et al 2022. Similarly, Jiang et al (2021) show that, during tranquil market conditions, corporate bond funds reduce liquid asset holdings to meet redemptions, whereas during market turmoil they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity.…”