Swing Pricing and Flow Dynamics in Light of the COVID-19 Crisis
59 Pages Posted: 21 Dec 2022
Date Written: December 9, 2022
Abstract
Swing pricing is a recent liquidity management tool designed to reallocate the liquidity cost from remaining to transacting investors by adjusting share prices. Based on unique text-mining data, we observe that its use is spreading among French funds, is systematically associated with an activation threshold, and is regularly associated with swing factor caps. We find that swing pricing had only a limited impact on the financial stability of funds during the COVID-19 turmoil. By disentangling the impact of the different types of swing pricing and analyzing situations of potential acute dilution, we identify that the observed limited effectiveness of swing pricing is mainly explained by the use of swing factor cap that prevents the stabilizing effect to offset a stigma effect. We thus conclude that while swing pricing has the potential to increase financial stability, funds should refrain from using swing factor caps so as not to mitigate stabilizing effects.
Keywords: liquidity management tools, swing pricing, investment funds, runs
JEL Classification: G10, G23, G28
Suggested Citation: Suggested Citation