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Reducing liquidity mismatch in open-ended funds: a cost-benefit analysis

Benjamin King () and James Semark ()
Additional contact information
Benjamin King: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
James Semark: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 975, Bank of England working papers from Bank of England

Abstract: Macroprudential authorities increasingly find themselves needing to assess, and act on, risks from outside the traditional banking system. How should they think about the costs and benefits of these actions? In this paper we present an approach to cost-benefit analysis for one topical issue related to non-banks – liquidity mismatch in open-ended funds (OEFs). In particular, we analyse the benefits and costs of more extensive use of swing pricing by UK corporate bond OEFs. Using several models, we quantify the impact of liquidity mismatch and swing pricing on corporate bond spreads and expected GDP growth. We estimate that greater use of swing pricing could reduce amplification of investment grade corporate bond spreads by around 8%, and improve the distribution of GDP growth. We discuss qualitatively the impact of swing pricing on fund liquidity buffers, and the possible costs of swing pricing. We conclude that there are likely to be financial stability benefits from more extensive use of swing pricing by UK corporate bond OEFs.

Keywords: Cost-benefit analysis; mutual funds; swing pricing; corporate bonds (search for similar items in EconPapers)
JEL-codes: D61 G12 G23 G28 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2022-04-22
New Economics Papers: this item is included in nep-fmk and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0975

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