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Swing Pricing and Fragility in Open-end Mutual Funds
Author:
Dunhong Jin null

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Marcin Kacperczyk null

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Bige Kahraman null

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Felix Suntheim null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 227
Language:
English
Publication Date:
01 Nov 2019
DOI:
https://doi.org/10.5089/9781513518336.001
ISBN:
9781513518336
ISSN:
1018-5941
Pages:
46
Keywords:
WP; swing pricing; pricing rule; fund investor; adjustment factor; liquidity mismatch; fund runs; fragility; strategic complementarity; pricing mechanism; Liquidity risk; Flow of funds; Mutual funds; Corporate bonds; Price structures; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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 positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund