Monetary policy and fragility in corporate bond mutual funds

John Chi-Fong Kuong, O’Donovan, James and Jinyuan Zhang

Journal of Financial Economics, 2024, vol. 161, issue C

Abstract: We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model’s predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

Keywords: Monetary policy; Corporate bond mutual funds; Fund redemption; Financial fragility; Market liquidity (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:161:y:2024:i:c:s0304405x24001545

DOI: 10.1016/j.jfineco.2024.103931

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