Research / BFI Working PaperApr 23, 2021

Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets

Antonio Falato, Itay Goldstein, Ali Hortaçsu

In the decade following the financial crisis of 2008, investment funds in corporate bond markets became prominent market players and generated concerns of financial fragility. The COVID-19 crisis provides an opportunity to inspect their resilience in a major stress event. Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a “bond-fund fragility channel” whereby the Fed liquidity backstop transmits to the real economy via funds.

More Research From These Scholars

BFI Working Paper Feb 1, 2019

Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets

Ali Hortaçsu, Fernando Luco, Steven L. Puller, Dongni Zhu
Topics:  Uncategorized
BFI Working Paper Sep 25, 2019

Prices and Promotions in U.S. Retail Markets: Evidence from Big Data

Gunter J. Hitsch, Ali Hortaçsu, Xiliang Lin
Topics:  Industrial Organization
BFI Working Paper Apr 25, 2020

Estimating the Fraction of Unreported Infections in Epidemics with a Known Epicenter: An Application to COVID-19

Ali Hortaçsu, Jiarui Liu, Timothy Schwieg
Topics:  COVID-19