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Redemption risk and cash hoarding by asset managers

Stephen Morris (), Ilhyock Shim and Hyun Song Shin

Journal of Monetary Economics, 2017, vol. 89, issue C, 71-87

Abstract: Open-end mutual funds face investor redemptions, but the sale of the underlying assets depends on asset managers’ portfolio decisions. If asset managers use cash holdings as a buffer to meet redemptions, they can mitigate fire sales of the assets. If they hoard cash in response to redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display stronger cash hoarding.

Keywords: Asset manager; Bond market liquidity; Cash hoarding; Global game; Investor redemption (search for similar items in EconPapers)
JEL-codes: E52 G11 G15 G23 (search for similar items in EconPapers)
Date: 2017
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