PT  - JOURNAL ARTICLE
AU  - Stephen Laipply
AU  - Ananth Madhavan
TI  - Bond Mutual Fund and Exchange-Traded Fund Flows in Stressed Markets: Empirical Evidence on the Destabilization Hypothesis
AID  - 10.3905/jfi.2022.1.151
DP  - 2022 Dec 20
TA  - The Journal of Fixed Income
PG  - jfi.2022.1.151
4099  - https://pm-research.com/content/early/2022/12/20/jfi.2022.1.151.short
4100  - https://pm-research.com/content/early/2022/12/20/jfi.2022.1.151.full
AB  - The proposed mechanism for what we term the destabilization hypothesis is that an exogenous shock triggers large redemptions by fund investors, requiring fund managers to sell securities to raise cash, leading to further drops in security prices and increased systemic risk. Although a large body literature finds little evidence of fund-driven fire-sales in bond markets, the destabilization hypothesis has seen renewed interest among academics and policymakers in the context of bond funds. We examine the impact of shocks on US bond fund flows by sub-asset class and by type of investment vehicle. The time-series analysis we conducted shows that a risk-off shock to markets does not necessarily result in large bond fund outflows. Accordingly, we conclude that there is little evidence that bond funds are a source of systemic risk, particularly bond exchange-traded funds. We also find no evidence of a non-linear response of flows to large shocks.