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Liquidity buffers and open-end investment funds: Containing outflows or reducing fire sales?

Author

Listed:
  • Dekker, Lennart
  • Molestina Vivar, Luis
  • Wedow, Michael
  • Weistroffer, Christian

Abstract

Using a sample of open-end corporate bond funds domiciled in the euro area, we exploit the COVID-19 market turmoil in March 2020 to examine two channels through which liquidity buffers can reduce procyclicality in the investment fund sector. First, we find no evidence that liquidity buffers reduced outflows during the peak of the COVID-19 crisis. Second, we find that funds entering the crisis with higher liquidity buffers were less likely to involve in cash hoarding and more likely to use cash buffers to meet outflows. Our results suggest that higher liquidity buffers can reduce procyclicality primarily through supporting the liquidity management strategies employed by fund managers.

Suggested Citation

  • Dekker, Lennart & Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2024. "Liquidity buffers and open-end investment funds: Containing outflows or reducing fire sales?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001774
    DOI: 10.1016/j.intfin.2023.101909
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    Keywords

    Corporate bond funds; Investor redemptions; Liquidity management; COVID-19 pandemic;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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