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  5. Asset Pricing: Mutual Funds
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Asset Pricing: Mutual Funds

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Napoleon D
Hosted By: American Finance Association
  • Chair: Veronika Pool, Vanderbilt University

Bond Price Fragility and the Structure of the Mutual Fund Industry

Mariassunta Giannetti
,
Stockholm School of Economics
Pab Jotikasthira
,
Southern Methodist University

Abstract

We show that mutual funds with a large share of a bond issue sell their holdings of that issue to a lower extent when they experience redemptions, arguably because they attempt to avoid a drop in the bond price and the consequent negative spillovers on the unsold part of their position. Hence, ownership concentration limits bonds’ exposures to flow-induced fire sales. We exploit exogenous variation in the negative spillovers of forced sales arising from the Fed’s SMCCF to confirm the economic mechanism. We also explore our findings’ implications for fund performance and the stability of the bond mutual fund industry.

Mutual Fund Liquidity Creation

Sergey Chernenko
,
Purdue University
Viet-Dung Doan
,
Purdue University

Abstract

We develop a novel measure of the dollar value of liquidity created by open-end mutual funds. Our measure compares the costs investors would have incurred had they traded on their own in response to liquidity shocks with the actual costs incurred by open-end mutual funds when trading to satisfy investor redemptions. Applying this measure to municipal bond mutual funds, we show that during the 2008–2017 period the average fund provides liquidity services worth 1.80 cents per dollar of gross redemptions or 50 basis points of fund assets per year. The aggregate value of liquidity services provided during this period was $14–22 billion. We decompose liquidity creation into three components: 1) flow netting, 2) liquidity management, and 3) trade execution, and explore the cross-sectional and time-series variation in liquidity creation.

Money Management and Real Investment

Simon Gervais
,
Duke University
Günter Strobl
,
University of Vienna

Abstract

We propose and analyze an equilibrium model of money management in which the asset allocation decisions of money managers affect the production decisions of firms. The model produces two main results. First, comparing the performance of money managers to that of the overall market portfolio becomes less appropriate as investors (endogenously) choose to delegate more of their money to them. Indeed, as money managers control more money, their holdings get closer to the market portfolio, making it less likely that they outperform it. Second, although money managers may be outperformed by the market portfolio after their fees are taken into account, it is optimal for investors to hire their services. This is because money managers prompt a more efficient allocation of capital, making the economy more productive and firms more valuable in the process. In fact, as we show, the presence of money managers can improve the welfare of all investors, whether or not these investors choose to delegate their investment decisions to money managers.

The Economics of Mutual Fund Marketing

Jingxuan Chen
,
London School of Economics
Wenxi Jiang
,
Chinese University of Hong Kong
Mindy Xiaolan
,
University of Texas-Austin

Abstract

We analyze the allocation of human capital towards marketing and sales by U.S. mutual fund companies. With using a new dataset, we show that a significant share of employment of fund companies is devoted to marketing and distribution besides portfolio management. Mutual funds' marketing employee ratio (1) is related to fund family size, (2) predicts high subsequent fund flow, (3) is correlated with a more convex flow-to-performance sensitivity, (4) exhibit a non-monotonic relationship with past performance, and (5) increases with market volatility. We develop a framework based on costly learning and Bayesian persuasion to understand funds' optimal marketing allocation and reconcile the empirical patterns.

Discussant(s)
Nina Boyarchenko
,
Federal Reserve Bank of New York
Caitlin Dannhauser
,
Villanova University
Eitan Goldman
,
Indiana University
Yanhao Wei
,
University of Southern California
JEL Classifications
  • G1 - Asset Markets and Pricing