Working Paper: CEPR ID: DP13929
Authors: Dunhong Jin; Marcin Kacperczyk; Bige Kahraman; Felix Suntheim
Abstract: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The stabilizing effect is internalized particularly by institutional investors and investors with longer investment horizons. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
Keywords: liquidity mismatch; fund runs; fragility; swing pricing; strategic complementarity
JEL Codes: G2; G23; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| swing pricing (G13) | reduction in redemptions during stress periods (G33) |
| swing pricing (G13) | stabilizing effect on fund flows (F32) |
| swing pricing (G13) | less volatile flows (L95) |
| swing pricing (G13) | less likelihood of portfolio liquidation during market stress (G33) |
| swing pricing (G13) | reduced sensitivity of outflows to poor performance (D29) |
| swing pricing (G13) | mitigates run incentives (D47) |
| swing pricing (G13) | eliminates first-mover advantage associated with traditional pricing rules (D43) |
| swing pricing (G13) | benefits institutional investors and those with longer investment horizons (G23) |
| swing pricing (G13) | reduces likelihood of redemptions in stress periods compared to traditional pricing (G19) |