Redemption risk and cash hoarding by asset managers |
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| Institution: | 1. Princeton University, Princeton, NJ, United States;2. Monetary and Economic Department, Bank for International Settlements, 78F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong Special Administrative Region;3. Monetary and Economic Department, Bank for International Settlements, Centralbahnplatz 2, Basel, Switzerland;1. Massachusetts Institute of Technology and Carnegie-Mellon University, 50 Memorial Drive, Cambridge, MA 02142, USA;2. University of Pennsylvania and NBER, 3718 Locust Walk, 428 McNeil Building, Philadelphia, PA 19104, USA;1. University of Southern California, 701 Exposition Blvd., Los Angeles, CA 90089, United States;2. Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX |
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| Abstract: | Open-end mutual funds face investor redemptions, but the sale of the underlying assets depends on asset managers’ portfolio decisions. If asset managers use cash holdings as a buffer to meet redemptions, they can mitigate fire sales of the assets. If they hoard cash in response to redemptions, they will amplify fire sales. We present a global game model of investor runs and identify conditions under which asset managers hoard cash. In an empirical investigation of bond mutual funds, we find that cash hoarding is the rule rather than the exception, and that less liquid bond funds display stronger cash hoarding. |
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