Bank Debt, Mutual Fund Equity, and Swing Pricing in Liquidity Provision

Yiming Ma, Kairong Xiao and Yao Zeng

No 33472, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Liquidity provision is often attributed to debt-issuing intermediaries like banks. We develop a unified theoretical framework and empirically show that mutual funds issuing demandable equity also provide an economically significant amount of liquidity by insuring against idiosyncratic liquidity shocks. Quantitatively, bond funds provide 12.5% of the liquidity that banks provide per dollar. Our model further shows that when equity values incorporate the liquidation cost from redemptions, as in swing pricing, liquidity provision is not necessarily reduced. This is because swing pricing may increase funds' capacity for holding illiquid assets without inducing panic runs.

JEL-codes: G2 G21 G23 G28 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-fmk and nep-mon
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