Factset Corporate Bond Mutual Funds

Anil K Kashyap, Stevens Distinguished Service Professor of Economics and Finance

We document new evidence suggesting that bond mutual fund prices are stale and consequently investors have an incentive to withdraw in times of stress to get out before prices fully adjust to reflect market conditions. In particular, we show that during stress periods movements in exchange traded funds predict subsequent movements in bond mutual funds. We develop a model of how mutual fund prices would be set when the underlying securities trade infrequently so that their prices must be estimated. We show that introducing swing pricing can remove the incentive to withdraw. We also show that a social planner would choose a more aggressive degree of swing pricing than would an individual fund, because the planner recognizes that effect of deterring withdrawals on equilibrium prices.