Skip to main content

Does liquidity management lead to fragility in asset prices: evidence from bond mutual funds

An Centre of Governance, Regulation and Industrial strategy seminar by Dr Xin Liu, University of Bath

  • 9 Mar 2020, 1.15pm to 9 Mar 2020, 2.00pm GMT
  • 4.23, 8 West, University of Bath
  • This event is free

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:

  1. treasury pairs commonly held by bond funds exhibit higher return comovements than pairs with little common ownership, controlling for similarities in bond characteristics; and

  2. 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.


This event will take place on campus.

4.23 8 West University of Bath Claverton Down Bath BA2 7AY United Kingdom

Contact us

If you have any questions, please get in touch.