Dr Xin Liu will be presenting a paper, co-authored with Shiyang Huang, Wenxi Jiang, and Xiaoxi Liu.
Abstract: Bond mutual funds with illiquid assets (e.g., corporate bonds) are vulnerable to large redemptions. To manage this risk, we find that bond funds use liquid assets (e.g., cash or treasuries) as the buffer. We further hypothesize that this liquidity management practice transmits flow shocks into correlated trading of the buffer assets, inducing excessive fluctuations and downside fragility in asset prices. Using the holding data of U.S. bond mutual funds, we find supporting evidence:
treasury pairs commonly held by bond funds exhibit higher return comovements than pairs with little common ownership, controlling for similarities in bond characteristics; and
this effect is more pronounced during market downturns, among funds with more illiquid assets, and when funds experience large outflows. These patterns do not extend to corporate bonds.
About the speaker
Dr Xin Liu is a Lecturer in Finance at School of Management, University of Bath since 2018.