Burned by leverage? Flows and fragility in bond mutual funds

Luis Molestina Vivar, Michael Wedow and Christian Weistroffer

Journal of Empirical Finance, 2023, vol. 72, issue C, 354-380

Abstract: We study bond fund flows to provide new evidence for the link between mutual fund leverage and financial fragility. Using novel data on mutual fund leverage, 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. For identification, we exploit a change in the regulatory framework which facilitated the wider use of leverage through derivatives for European mutual funds. Our findings suggest that leverage can amplify fragility in the mutual bond fund sector.

Keywords: Bond funds; Fund leverage; Financial fragility (search for similar items in EconPapers)
JEL-codes: G01 G20 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Working Paper: Burned by leverage? Flows and fragility in bond mutual funds (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:72:y:2023:i:c:p:354-380

DOI: 10.1016/j.jempfin.2023.04.003

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