Mutual Fund Fragility, Dealer Liquidity Provision, and the Pricing of Municipal Bonds

• 成果类型: Article
• 署名作者: Li, Yi; O'Hara, Maureen; Zhou, Xing (Alex)
• 署名单位: Federal Reserve System - USA; Federal Reserve System Board of Governors; Cornell University; Southern Methodist University
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.4912
• 发表日期: 2024
• 页码: 4802-4823
• 关键词: Municipal bonds; mutual fund fragility; dealer; liquidity; pricing; Covid-19

摘要

Against the backdrop of COVID-19, we study how the interactions of mutual funds and dealers introduce fragility to the municipal bond market and induce lasting market impacts. During the crisis, trading surges, whereas dealers' liquidity provision plunges for mutual-fund-held bonds, leading to greater price depressions in these bonds. Importantly, the crisis reshapes the market's perceptions of mutual fund fragility risks, with the aftermath-yield spreads widening significantly more for bonds with greater mutual fund exposures. Such postcrisis pricing effects reflect dealers' continued reluctance to provide liquidity for mutual fund-held bonds, and they are stronger for bonds whose mutual fund holders are more susceptible to investor runs.