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 these funds during this period, far greater than anything they experienced in past events. Large outflows were sustained over several weeks and were widespread across funds. Inspecting the role of sources of fragility, we show that both the illiquidity of fund assets and the vulnerability to fire sales were important factors in explaining outflows in this episode. The exposure to sectors most hurt by the COVID-19 crisis was also important. Two policy announcements by the Federal Reserve about extraordinary direct interventions in corporate-bond markets seem to have played an important role in calming down the panic and reversing the outflows.

More Research From These Scholars

BFI Working Paper Jul 27, 2018

How Wide Is the Firm Border?

Enghin Atalay, Ali Hortaçsu, Mary Jialin Li, Chad Syverson
BFI Working Paper Mar 2, 2020

Random-Coefficients Logit Demand Estimation with Zero-Valued Market Shares

Jean-Pierre Dubé, Ali Hortaçsu, Joonhwi Joo
BFI Working Paper Oct 21, 2019

Design and Analysis of Cluster-Randomized Field Experiments in Panel Data Settings

Bharat K. Chandar, Ali Hortaçsu, John List, Ian Muir, Jeffrey M. Wooldridge
Topics:  Employment & Wages