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Journal of Financial Economics Vol. 161 2024

Monetary policy and fragility in corporate bond mutual funds

John Chi-Fong Kuong1; James O’Donovan2; Jinyuan Zhang3

1 Chinese University of Hong Kong · 2 City University of Hong Kong · 3 University of California, Los Angeles

open access

Abstract

We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model’s predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

DOI
10.1016/j.jfineco.2024.103931
Volume
161
Pages
103931
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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