How Does Deleveraging Affect Funding Market Liquidity?

Buhui Qiu (), Gary Gang Tian () and Haijian Zeng ()
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Buhui Qiu: Discipline of Finance, University of Sydney Business School, University of Sydney, New South Wales 2006, Australia
Gary Gang Tian: Department of Applied Finance, Macquarie Business School, Macquarie University, New South Wales 2109, Australia
Haijian Zeng: Department of Finance and Insurance, School of Business, Guangxi University, Nanning, Guangxi 530004, China

Management Science, 2022, vol. 68, issue 6, 4568-4601

Abstract: How does deleveraging affect the market liquidity of high-embedded-leverage securities issued by financial institutions and the funding constraints of these institutions? We use the forced deleveraging of structured mutual funds during the 2015 Chinese stock market crash to study the effects of deleveraging. Our regression-discontinuity analysis shows that deleveraging significantly reduces the market liquidity of the deleveraging funds’ equity units. Moreover, our difference-in-differences analysis shows that deleveraging results in large decreases in subsequent fund flows, stock and cash holdings, and performance, with the impact channeled through the deterioration of the market liquidity of the fund’s equity units.

Keywords: deleveraging; funding market liquidity; funding liquidity crisis (search for similar items in EconPapers)
Date: 2022
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