Swing Pricing and Fragility in Open-end Mutual Funds

By Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, Felix Suntheim

November 1, 2019

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Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, and Felix Suntheim. Swing Pricing and Fragility in Open-end Mutual Funds, (USA: International Monetary Fund, 2019) accessed November 21, 2024

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.

Summary

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.

Subject: Corporate bonds, Financial institutions, Financial regulation and supervision, Flow of funds, Liquidity risk, Mutual funds, National accounts, Price structures, Prices

Keywords: Adjustment factor, Corporate bonds, Flow of funds, Fragility, Fund investor, Fund runs, Global, Liquidity mismatch, Liquidity risk, Mutual funds, Price structures, Pricing mechanism, Pricing rule, Strategic complementarity, Swing pricing, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/227
Stock No:

WPIEA2019227
ISBN:

9781513518336
ISSN:

1018-5941

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