RSFAS Seminar Series – Dr Nicola Cetorelli

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Speaker: Dr Nicola Cetorelli

Institution: Federal Reserve Bank of New York

Date and Time: Friday, 17 September 2021, 10:00-11:00

Title: Mutual Funds as Lenders. Liquidity Fragility in Loan Funds and Shock Transmission

Abstract: Loan funds are a significant component of shadow banking’s corporate term lending. Loan funds invest most of their assets in leveraged loans, which are not liquid, and offer investors the opportunity to redeem their shares at will. This liquidity-transformation role exposes loan funds to run risk, particularly in periods of stress. We find evidence consistent with this prior. Investors in loan funds exhibit a significant positive relationship with funds' performance, and this sensitivity is between four and seven times as high as that of investors in benchmark corporate bond fund segments. And likewise, loan funds exhibit a much stronger concavity in the flow and performance relationship. Further, we find evidence of multiple, conflicting channels linking monetary policy and investors' net flows in loan funds, but also that on average monetary policy has a pro-cyclical impact in the leveraged lending market.

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