How Does Deleveraging Affect Funding Market Liquidity?

Management Science, Forthcoming

83 Pages Posted: 4 Mar 2021 Last revised: 8 Mar 2021

See all articles by Buhui Qiu

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Zeng Hai Jian

Guangxi University

Date Written: February 23, 2021

Abstract

How does deleveraging affect the market liquidity of high-embedded-leverage securities issued by financial institutions and the funding constraints of these institutions? We use the forced deleveraging of structured mutual funds during the 2015 Chinese stock market crash to study the effects of deleveraging. Our regression-discontinuity analysis shows that deleveraging significantly reduces the market liquidity of the deleveraging funds’ equity units. Moreover, our difference-in-differences analysis shows that deleveraging results in large decreases in subsequent fund flows, stock and cash holdings, and performance, with the impact channeled through the deterioration of the market liquidity of the fund’s equity units.

Keywords: Deleveraging; Funding Market Liquidity; Funding Liquidity Crisis

JEL Classification: G01, G10, G20

Suggested Citation

Qiu, Buhui and Tian, Gary Gang and Hai Jian, Zeng, How Does Deleveraging Affect Funding Market Liquidity? (February 23, 2021). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3796724

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Zeng Hai Jian

Guangxi University ( email )

East Daxue Road #100
Nanning, Guangxi 530004
China

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