 Negative externalities of mutual fund instability: Evidence from leveraged loan fundsThomas Mählmann Journal of Banking & Finance, 2022, vol. 134, issue C Abstract: The market for leveraged loans that provide debt financing for risky companies has been on an exceptional growth path over the last decade. With the increased presence of investment funds in this market, however, come increased concerns – namely, whether a sharp rise of redemptions by fund investors could set off a cascade of drops in secondary loan prices and whether these price falls could trigger further redemptions, ultimately fueling a downward price and liquidity spiral? This paper provides evidence consistent with the view that in times of loan market stress, fund flows and loan price returns have been pro-cyclical, i.e., have reinforced each other's movements. Furthermore, fund outflows foster market illiquidity. Importantly, the paper identifies lending by CLOs as a channel through which outflow-induced price dislocations in the secondary market transmit to corporate borrowing, making it harder for leveraged companies to rollover their existing debt exactly at a time when liquidity is needed most (in market downs). Keywords: Leveraged loans; Liquidity mismatch; Investment funds (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:134:y:2022:i:c:s037842662100279x DOI: 10.1016/j.jbankfin.2021.106328 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.