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Managing the liquidity mismatch for mutual funds in the secondary corporate bond market

Enthoven, J.J. (2015) Managing the liquidity mismatch for mutual funds in the secondary corporate bond market.

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Abstract:We investigate the liquidity mismatch in the secondary market for European and American corporate bonds. Currently, mutual fund managers promise more liquidity than is available in the underlying securities of the funds they manage. In a possible credit event, a run to the door might occur. The first investor to redeem his money might obtain the more liquid part of the fund, leaving the remaining investors who want to redeem to take a discount on the valuation of the underlying assets. The remaining investors are paying for the liquidity option of the first investor that exits the fund. We analyze the liquidity environment with the Enhanced TRACE database from July 2007 until December 2012 using proxies suggested in the literature. We further analyze liquidity with several market practices from sell-side researchers, such as the LCS from Barclays, the Transaction Cost model from Aladdin and the BVAL from Bloomberg. Additional data is obtained from interviews with financial professionals. During the interviews, we discussed the possible actions for regulators, the market and the individual fund manager. We use the analysis and the interviews for short term and long term suggestions to manage the liquidity mismatch.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
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