A dynamic theory of mutual fund runs and liquidity management

Arbeitspapier

I model an open-end mutual fund investing in illiquid assets and show that the fund's endogenous cash management can generate shareholder runs even with a flexible NAV. The fund optimally re-builds its cash buffers at time t + 1 after outflows at t to prevent future forced sales of illiquid assets. However, cash rebuilding at t + 1 implies predictable voluntary sales of illiquid assets, generating a predictable decline in NAV. This generates a first-mover advantage, leading to runs. A time-inconsistency problem aggravates runs: the fund may want to pre-commit not to re-build cash buffers but cannot credibly do so absent a commitment device.

Object Details

• ISBN: 978-92-95210-04-2
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 42

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Bankruptcy; Liquidation
• Subject: open-end mutual fund ; illiquid assets ; shareholder runs ; cash rebuilding ; flexible NAV

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Zeng, Yao
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2017

Further information

• DOI: doi:10.2849/89957
• Handle: http://hdl.handle.net/10419/193549
• Last update: 10.03.2025, 11:43 AM CET