Financial Contagion in the Mutual Fund Industry - Closed-End Funds, Auction Rate Securities, and Fire-Sale Cascades

• Applicant: Professor Dr. Tim Adam
• Subject Area: Accounting and Finance
• Term: from 2017 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 354824103

In this project we examine fire-sales and the potential for financial contagion in the U.S. mutual fund industry. With about $16 trillion of assets under management at the end of 2014, this industry represents a large sector of the financial services industry and is therefore subject to significant regulatory concerns. In early 2008, the funding situation of levered closed-end funds unexpectedly deteriorated so that some funds were forced to reduce their leverage by selling assets. We will examine to what extent these forced sales resulted in fire-sales and whether these fire-sales triggered additional fire-sales at other (open-end) funds, which were not directly affected by the initial shock. Fire-sales that spread from one market segment to another are called fire-sale cascades, and can pose a significant threat to the stability of the financial system. Therefore, our study will help regulators to better understand how different financial markets are connected, and that financial contagion can also originate from levered mutual funds, which are a relatively small part of the total mutual fund industry.

• DFG Programme: Research Grants
• International Connection: USA
• Cooperation Partners: Professor Richard Evans, Ph.D.; Professor Christopher Schwarz, Ph.D.