Conference Agenda

We show that after the introduction of leverage ratio constraints on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investment-grade corporate bonds and that the performance of funds with liquidity-supplying strategies has benefited. Not only have regulations transferred profits associated with liquidity provision in the corporate bond market to mutual funds, but the liquidity and returns of investment-grade corporate bonds have become more exposed to redemptions from the bond mutual fund industry, suggesting that the regulations may have made investment-grade corporate bonds more volatile. Accordingly, we observe that investment-grade corporate bonds more exposed to leverage ratio constraints experienced a more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.

We propose a novel method to impute daily mutual fund trades in individual stocks from daily stock prices and returns and quarterly fund holdings, monthly total net assets and daily fund returns -- so that the method can be applied to standard CRSP mutual fund data. We set up an (underidentified) system of linear equations and solve the underidentification issue with an iterative method that applies random and adaptive constraints on trade incidence. The method produces daily, stock-level trade estimates with associated confidence levels. Validation and simulation analyses using proprietary daily fund trading data show good accuracy, especially for larger trades.