Burned by leverage? Flows and fragility in bond mutual funds

Luis Molestina Vivar, Michael Wedow and Christian Weistroffer

No 2413, Working Paper Series from European Central Bank

Abstract: Does leverage drive investor flows in bond mutual funds? Leverage can increase fund returns in good times, but it can also magnify investors’ losses and their response to bad performance. We study bond fund flows to provide new evidence for the link between mutual fund leverage and financial fragility. We find that outflows are greater in leveraged funds during stressed periods and after bad performance, compared with unleveraged funds. We provide supporting evidence that leverage exacerbates the negative externality in investors' redemption decisions. In this regard, we find that fund managers in leveraged funds react more procyclically to net outflows compared with fund managers in unleveraged funds. Such procyclical security sales in leveraged funds may increase investors’ first-mover advantages and their response to bad performance. These findings suggest that leverage amplifies fragility in the bond mutual fund sector. JEL Classification: G01, G20, G23

Keywords: bond funds; financial fragility; fund leverage (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-fmk
Note: 406092
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Burned by leverage? Flows and fragility in bond mutual funds (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202413

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