Friday seminar - "Bank Debt versus Mutual Fund Equity in Liquidity Provision", Yiming Ma (Columbia Business School)
"Bank Debt versus Mutual Fund Equityin Liquidity Provision"
Abstract: Liquidity provision is often attributed to debt-issuing intermediaries like banks. We show that mutual funds issuing demandable equity also provide liquidity by insuring against idiosyncratic liquidity shocks. Quantitatively, the average bond fund provides 5.08 cents of liquidity per dollar, which is economically signi cant at one- fth of that of banks. We nd that liquidity provision is improved by 6.7% when equity values incorporate the liquidation cost from redemptions, as in swing pricing. This is because swing pricing increases funds' capacity for holdings illiquid assets without inducing panic runs.