Does swing pricing reduce investment funds’ liquidity risk in times of market stress? – Evidence from the March-2020 episode

Gabriel Shui-Tang Wu, Joe Ho-Yeung Wong and Tom Pak-Wing Fong

The North American Journal of Economics and Finance, 2024, vol. 72, issue C

Abstract: The March-2020 episode has raised questions on whether the post-GFC reforms on the liquidity management of open-ended funds’ (OEFs) adequately contain their liquidity risk in times of market stress. Using an extensive dataset that covers this episode, our study shows that swing pricing could help to mitigate OEFs’ redemption pressures in times of market stress. However, the mitigating effect may be limited by two factors. First, swing pricing could encourage OEFs to raise leverage during normal periods, which may lead to substantial losses and amplify the redemption pressures in a stressful episode. Secondly, the swing pricing-led volatility of OEF returns is found to be associated with a larger volatility of OEFs’ flows. While our results suggest that swing pricing would be one effective tool for liquidity management of OEFs, it may come with “side effects”, including larger flow volatility and higher leverage. A proper design and combination with other risk management tools may be warranted for swing pricing to work in a more effective way.

Keywords: Swing pricing; Open-ended funds; March-2020; Financial stability; Panel data regressions; Financial econometrics (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:72:y:2024:i:c:s1062940824000433

DOI: 10.1016/j.najef.2024.102118

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