Swing Pricing: Theory and Evidence

Agostino Capponi (), Paul Glasserman () and Marko Weber ()
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Agostino Capponi: Department of Industrial Engineering and Operations Research, Columbia University, New York, NY, USA
Paul Glasserman: Columbia Business School, Columbia University, New York, NY, USA
Marko Weber: Mathematics Department, National University of Singapore, Singapore

Annual Review of Financial Economics, 2023, vol. 15, issue 1, 617-640

Abstract: Open-end mutual funds offer investors same-day liquidity while holding assets that in some cases take several days to sell. This liquidity transformation creates a potentially destabilizing first-mover advantage: When asset prices fall, investors who exit a fund earlier may pass the liquidation costs generated by their share redemptions to investors who remain in the fund. This incentive becomes particularly acute in periods of market stress, and it can amplify fire-sale spillover losses to other market participants. Swing pricing is a liquidity management tool that targets this first-mover advantage. It allows a fund to adjust or “swing” its net asset value in response to large flows out of or into a mutual fund. This article discusses the industry and regulatory context for swing pricing, and it reviews theory and empirical evidence on the design and effectiveness of swing pricing. The article concludes with directions for further research.

Keywords: mutual funds; liquidity transformation; fire sales; liquidity management (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1146/annurev-financial-110921-100843

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