Liquidity buffers and open-end investment funds: Containing outflows or reducing fire sales?

Lennart Dekker, Luis Molestina Vivar, Michael Wedow and Christian Weistroffer

Journal of International Financial Markets, Institutions and Money, 2024, vol. 91, issue C

Abstract: Using a sample of open-end corporate bond funds domiciled in the euro area, we exploit the COVID-19 market turmoil in March 2020 to examine two channels through which liquidity buffers can reduce procyclicality in the investment fund sector. First, we find no evidence that liquidity buffers reduced outflows during the peak of the COVID-19 crisis. Second, we find that funds entering the crisis with higher liquidity buffers were less likely to involve in cash hoarding and more likely to use cash buffers to meet outflows. Our results suggest that higher liquidity buffers can reduce procyclicality primarily through supporting the liquidity management strategies employed by fund managers.

Keywords: Corporate bond funds; Investor redemptions; Liquidity management; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: G01 G11 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001774

DOI: 10.1016/j.intfin.2023.101909

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