Chaire ACPR régulation et risque systèmique Swing Pricing for Mutual Funds: Breaking the Feedback Loop Between Fire Sales and Fund Redemptions
We develop a model of the feedback between mutual fund out ows and asset illiquidity. Following a market shock, alert investors anticipate the impact on a fund's net asset value (NAV) of other investors' redemptions and exit rst at favorable prices. This rst-mover advantage may lead to fund failure through a cycle of falling prices and increasing redemptions. Our analysis shows that (i) the rst-mover advantage introduces a nonlinear dependence between a market shock and the aggregate impact of redemptions on the fund's NAV; (ii) as a consequence, there is a critical magnitude of the shock beyond which redemptions brings down the fund; (iii) properly designed swing pricing transfers liquidation costs from the fund to redeeming investors and, by removing the nonlinearity stemming from the rst-mover advantage, it reduces these costs and prevents fund failure. Achieving these objectives requires a larger swing factor at larger levels of out ows. The swing factor for one fund may also depend on policies followed by other funds.
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- Publié le 16/04/2019
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Mis à jour le : 16/04/2019 11:14