Topic: Dynamic Liquidity Management by Corporate Bond Mutual Funds

Speaker: Ashley Wang, Senior Economist, Board of Governors of the Federal Reserve System

Date: June 29^th (Wed.)

Time: 1:30-2:30pm

Location: Building 4, Room 101

Language: English

Abstract:

This paper explores dynamic liquidity management by 578 open-end corporate bond funds during the period from 2002 to 2014. We find that during tranquil markets, managers of corporate bond funds tend to reduce their holdings of liquid assets such as cash and government bonds to meet investor redemptions, engaging in a “horizontal cut” of their asset allocations along the liquidity spectrum. During periods with heightened macroeconomic uncertainty, however, managers tend to liquidate relatively proportionally across asset classes, pursuing a “vertical cut” and maintaining portfolio liquidity. Consistent with the existence of a target ratio of liquid assets, we find that managers tend to sell illiquid assets to restore their holdings of liquid assets subsequent to investor redemptions, especially amid elevated macroeconomic uncertainty. Turning to individual securities, we find that when liquidating corporate bonds to meet redemptions, managers tend to follow a “liquidity pecking order,” selling relatively liquid corporate bonds first, which could mitigate immediate asset liquidation costs. The micro-level liquidity management practices of corporate bond funds have implications for financial stability of broad markets.

About the speaker:

Ashley Wang is currently a Senior Economist at Federal Reserve Board, Washington DC as well as an adjunct finance faculty at Georgetown University. She received her PhD degree in finance from Anderson School, UCLA, Los Angeles, CA in 2003. Ashley’s research focuses on empirical asset pricing, liquidity risk, institutional investors and mutual funds and hedge fund. She has published in Review of Financial Studies, Journal of Empirical Finance and Journal of Finance, among others.