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Towards a Macroprudential Framework for Investment Funds: Swing Pricing and Investor Redemptions

Author

Listed:
  • Ulf Lewrick

    (Bank for International Settlements, University of Basel)

  • Jochen Schanz

    (European Investment Bank)

Abstract

How effective are available policy tools in managing systemic liquidity risks in the mutual fund industry? We assess one such tool—swing pricing—which allows funds to adjust their settlement price in response to large flows. A global game guides our empirical analysis. Consistent with its predictions, we show that during normal market conditions swing pricing dampens outflows in reaction to weak fund performance by mitigating investor first-mover advantages. Yet during episodes of market stress, swing pricing fails to contain redemption pressures despite supporting fund returns. This calls for adjusting swing pricing rules to achieve macroprudential objectives.

Suggested Citation

  • Ulf Lewrick & Jochen Schanz, 2023. "Towards a Macroprudential Framework for Investment Funds: Swing Pricing and Investor Redemptions," International Journal of Central Banking, International Journal of Central Banking, vol. 19(3), pages 229-267, August.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:3:a:6
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    References listed on IDEAS

    as
    1. Sergey Chernenko & Adi Sunderam, 2016. "Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds," NBER Working Papers 22391, National Bureau of Economic Research, Inc.
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    3. Molestina Vivar, Luis & Wedow, Michael & Weistroffer, Christian, 2023. "Burned by leverage? Flows and fragility in bond mutual funds," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 354-380.
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    6. O'Hara, Maureen & Zhou, Xing (Alex), 2021. "Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 142(1), pages 46-68.
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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