Shidler Seminar Series: FEI Guest Speaker Dr. David T. Ng, Professor of Finance, Cornell University

Investor Flows and Fragility in Corporate Bond Funds

Dr. David T. Ng
Professor of Finance, Cornell University

  • Date: Friday, September 9, 2016
  • Time: 3:00–4:30 p.m.
  • Location: BusAd D-204

Abstract

Investment in bond mutual funds has grown rapidly in recent years. With it, there is a growing concern that they are a new source of potential fragility. While there is a vast literature on flows in equity mutual funds, relatively little research has been done on bond mutual funds. In this paper, we explore flow patterns in corporate-bond mutual funds. We show that their flows behave quite differently than those of equity mutual funds. While we confirm the well-known convex shape for equity funds’ flow-to- performance over the period of our study, we show that during the same time, corporate bond funds exhibit a concave shape: their outflows are sensitive to bad performance more than their inflows are sensitive to good performance. Moreover, corporate bond funds tend to have greater sensitivity of outflows to bad performance when they have more illiquid assets and when the overall market illiquidity is high. These and other results we provide point to the possibility of fragility: The illiquidity of corporate bonds may generate a first mover advantage (or strategic complementarities) among investors in corporate-bond funds, amplifying their response to bad performance. We show that this behavior appears also in aggregate and explore some potential consequences for the real economy.

Speaker’s Bio

Dr. David Ng is a Professor of Finance at Cornell. He served as a Visiting Associate Professor of Finance at the Wharton School of the University of Pennsylvania from 2008 to 2010 and a Research Fellow at Wharton Financial Institutions Center. He conducts research in empirical asset pricing. In particular, he studies fund flows and examines how fund flows affect asset prices domestically and internationally. He received his Ph.D. with distinction from Columbia University.