Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity

Yiming Ma, Kairong Xiao and Yao Zeng

The Review of Financial Studies, 2022, vol. 35, issue 10, 4674-4711

Abstract: We identify fixed-income mutual funds as an important contributor to the unusually high selling pressure in liquid asset markets during the COVID-19 crisis. We show that mutual funds experienced pronounced investor outflows amplified by their liquidity transformation. In meeting redemptions, funds followed a pecking order by first selling their liquid assets, including Treasuries and high-quality corporate bonds, which generated the most concentrated selling pressure in these markets. Overall, the estimated price impact of mutual funds was sizable at a third of the increase in Treasury yields and a quarter of the increase in corporate bond yields during the COVID-19 crisis.

JEL-codes: E50 G01 G12 G23 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (50)

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