1. bookVolume 22 (2022): Edizione 1 (June 2022)
Dettagli della rivista
License
Formato
Rivista
eISSN
1898-0198
Prima pubblicazione
06 May 2008
Frequenza di pubblicazione
2 volte all'anno
Lingue
Inglese
access type Accesso libero

Modeling Distress in US High Yield Mutual Funds Before and During the Covid-19 Pandemic

Pubblicato online: 18 Jun 2022
Volume & Edizione: Volume 22 (2022) - Edizione 1 (June 2022)
Pagine: 263 - 286
Ricevuto: 08 Mar 2022
Accettato: 06 Apr 2022
Dettagli della rivista
License
Formato
Rivista
eISSN
1898-0198
Prima pubblicazione
06 May 2008
Frequenza di pubblicazione
2 volte all'anno
Lingue
Inglese
Abstract

Research background: In March 2020, when the US financial markets were in the grip of the COVID-19 crisis, the Fed instituted various policies and programs to alleviate stress in financial markets. One such program involved the Fed purchase of securities and ETFs in certain market segments, including high yield bonds. This buying action inspired investors to join the Fed (or front-run the Fed) in the high yield bond market, resulting in the tightening of spreads in that market to historically tight levels.

Purpose: In this research we investigate whether investors could have seen any signs of higher liquidity risk in US high yield mutual funds since the beginning of COVID-19 pandemic and avoid it. Theoretically, funds with heightened liquidity risk should have higher historical returns (adjusted for interest rate risk and credit risk) because borne risk requires return as compensation. But because of the unusual market conditions during the COVID-19 pandemic investors could look inside funds (to see what bonds the funds owned) and then avoid funds with holdings known to be less liquid.

Research methodology: The study is based on data on US mutual funds from the Morningstar Direct database. The authors made a serial correlation model with an AR(1) process and the lagged effects model vs CAPM model to measure two proxies for liquidity risk for each US high yield mutual fund in our fund universe, in order to identify those funds at particular risk for portfolio illiquidity since the beginning of the COVID-19 pandemic.

Results: it is found that the proposed measures may be an effective tool for selecting high yield funds against liquidity risk. Therefore, they should be considered by investors or analysts as a practical tool to identify funds that might be illiquid.

Novelty: The study focuses on the liquidity risk in US high yield bond mutual funds before and after the outbreak of the COVID-19 pandemic, which was a crisis situation with implications for liquidity risk. The methods used and results achieved may be a basis for studies of other types of funds and markets outside the USA.

Keywords

JEL Classification

Amihud, Y., Mendelson, H., Wood, R.A. (1990). Liquidity and the 1987 stock market crash. The Journal of Portfolio Management, 16 (3), 65–69. DOI: 10.3905/jpm.1990.409268. Apri DOISearch in Google Scholar

Asness, C., Krail, R., Liew, J. (2001). Do hedge funds hedge? be cautious in analyzing monthly returns. Journal of Portfolio Management, 28 (1), 6–19. DOI: 10.3905/jpm.2001.319819. Apri DOISearch in Google Scholar

Bai, J., Bali, T.G., Wen, Q. (2021). Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence. Journal of Financial Economics. DOI: 10.1016/j.jfineco.2021.05.003. Apri DOISearch in Google Scholar

Bali, T.G., Subrahmanyam, A., Wen, Q. (2021). Long-term reversals in the corporate bond market. Journal of Financial Economics, 139 (2), 656–677. DOI: 10.1016/J.JFINECO.2020.08.007. Apri DOISearch in Google Scholar

Bao, J., O’Hara, M., (Alex) Zhou, X. (2018). The Volcker Rule and corporate bond market making in times of stress. Journal of Financial Economics, 130 (1), 95–113. DOI: 10.1016/J.JFINECO.2018.06.001. Apri DOISearch in Google Scholar

Bessembinder, H., Jacobsen, S., Maxwell, W., Venkataraman, K. (2018). Capital Commitment and Illiquidity in Corporate Bonds. The Journal of Finance, 73 (4), 1615–1661. DOI: 10.1111/JOFI.12694. Apri DOISearch in Google Scholar

Brunnermeier, M.K., Pedersen, L.H. (2009). Market Liquidity and Funding Liquidity. The Review of Financial Studies, 22 (6), 2201–2238. DOI: 10.1093/RFS/HHN098. Apri DOISearch in Google Scholar

Buiter, W., Sibert, A. (2007). Subprime “crisis”: What Central Bankers should do and why. VOX, CEPR Policy Portal August 13. Retrieved from https://voxeu.org/article/subprime-crisis-what-central-bankers-should-do-and-why. Search in Google Scholar

Carhart, M.M. (1997). On persistence in mutual fund performance. Journal of Finance, 52 (1), 57–82. DOI: 10.1111/j.1540-6261.1997.tb03808.x. Apri DOISearch in Google Scholar

Chebbi, K., Ammer, M.A., Hameed, A. (2021). The COVID-19 pandemic and stock liquidity: Evidence from S&P 500. Quarterly Review of Economics and Finance, 81, 134–142. DOI: 10.1016/J.QREF.2021.05.008. Apri DOISearch in Google Scholar

Di Maggio, M., Kermani, A., Song, Z. (2017). The value of trading relations in turbulent times. Journal of Financial Economics, 124 (2), 266–284. DOI: 10.1016/J.JFINECO.2017.01.003. Apri DOISearch in Google Scholar

Edwards, A.K., Harris, L.E., Piwowar, M.S. (2007). Corporate Bond Market Transaction Costs and Transparency. The Journal of Finance, 62 (3), 1421–1451. DOI: 10.1111/J.1540-6261.2007.01240.X. Apri DOISearch in Google Scholar

Falato, A., Goldstein, I., Hortaçsu, A. (2021). Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets. Journal of Monetary Economics, 123, 35–52. DOI: 10.1016/J.JMONECO.2021.07.001. Apri DOISearch in Google Scholar

Fall, M., Louhichi, W., Viviani, J.L. (2019). Empirical tests on the asset pricing model with liquidity risk: An unobserved components approach. Economic Modelling, 80, 75–86. DOI: 10.1016/J.ECONMOD.2018.06.008. Apri DOISearch in Google Scholar

Fama, E.F., French, K.R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33 (1), 3–56. DOI: 10.1016/0304-405X(93)90023-5. Apri DOISearch in Google Scholar

Foley, S., Kwan, A., Philip, R., Ødegaard, A. (2021). Contagious margin calls: How COVID-19 threatened global stock market liquidity. DOI: 10.1016/j.finmar.2021.100689. Apri DOISearch in Google Scholar

FRED St. Louis Fed. (2021). ICE BofA US High Yield Index Effective Yield (BAMLH0A-0HYM2EY). Economic Data. Retrieved from https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY. Search in Google Scholar

Getmansky, M., Lo, A.W., Makarov, I., Getmansky, M., Lo, A., Makarov, I. (2004). An econometric model of serial correlation and illiquidity in hedge fund returns. Journal of Financial Economics, 74 (3), 529–609. Retrieved from https://econpapers.repec.org/RePEc:eee:jfinec:v:74:y:2004:i:3:p:529-609. Search in Google Scholar

International Monetary Fund (2021). Global Financial Stability Report. Retrieved from https://www.imf.org/en/Publications/GFSR. Search in Google Scholar

Investment Company Institute (2020). 2020 ICI Fact Book. Retrieved from https://www.ici.org. Search in Google Scholar

Jiang, H., Li, Y., Sun, Z., Wang, A. (2021). Does mutual fund illiquidity introduce fragility into asset prices? Evidence from the corporate bond market. Journal of Financial Economics. DOI: 10.1016/j.jfineco.2021.05.022. Apri DOISearch in Google Scholar

Joyce, M.A.S., Lasaosa, A., Stevens, I., Tong, M. (2011). The Financial Market Impact of Quantitative Easing in the United Kingdom. International Journal of Central Banking, 7 (3), 113–161. Retrieved from https://ideas.repec.org/a/ijc/ijcjou/y2011q3a5.html. Search in Google Scholar

Kargar, M., Lester, B., Lindsay, D., Liu, S., Weill, P.-O., Zúñiga, D. (2021). Corporate Bond Liquidity during the COVID-19 Crisis. The Review of Financial Studies, 34 (11), 5352–5401. DOI: 10.1093/RFS/HHAB063. Apri DOISearch in Google Scholar

Ma, Y., Xiao, K., Zeng, Y. (2022). Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity. The Review of Financial Studies. DOI: 10.1093/RFS/HHAC007. Apri DOISearch in Google Scholar

Mishra, A.K., Parikh, B., Spahr, R.W. (2020). Stock market liquidity, funding liquidity, financial crises and quantitative easing. International Review of Economics and Finance, 70, 456–478. DOI: 10.1016/j.iref.2020.08.013. Apri DOISearch in Google Scholar

Nozawa, Y., Qiu, Y. (2021). Corporate bond market reactions to quantitative easing during the COVID-19 pandemic. Journal of Banking & Finance, 133, 106153. DOI: 10.1016/J.JBANKFIN.2021.106153. Apri DOISearch in Google Scholar

O’Hara, M., Zhou, X. (Alex). (2021). Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis. Journal of Financial Economics, 142 (1), 46–68. DOI: 10.1016/J.JFINECO.2021.05.052. Apri DOISearch in Google Scholar

Pástor, Ľ., Stambaugh, R.F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111 (3), 642–685. DOI: 10.1086/374184. Apri DOISearch in Google Scholar

Pastor, L., Vorsatz, B. (2020). Mutual Fund Performance and Flows During the COVID-19 Crisis. SSRN Electronic Journal. DOI: 10.2139/ssrn.3648407. Apri DOISearch in Google Scholar

Van Horne, R.H. (2016). Liquidity risk measurement for mutual funds investing in less-liquid assets. Financial Sciences, 2 (27), 65–79. DOI: 10.15611/nof.2016.2.05. Apri DOISearch in Google Scholar

Zaremba, A., Aharon, D.Y., Demir, E., Kizys, R., Zawadka, D. (2021). COVID-19, government policy responses, and stock market liquidity around the world: A note. Research in International Business and Finance, 56. DOI: 10.1016/J.RIBAF.2020.101359. Apri DOISearch in Google Scholar

Articoli consigliati da Trend MD

Pianifica la tua conferenza remota con Sciendo