Modeling Distress in US High Yield Mutual Funds Before and During the Covid-19 Pandemic

Abstract

Research background: In March 2020, when the US financial markets were in the grip of the COVID-19 crisis, the Fed instituted various policies and programs to alleviate stress in financial markets. One such program involved the Fed purchase of securities and ETFs in certain market segments, including high yield bonds. This buying action inspired investors to join the Fed (or front-run the Fed) in the high yield bond market, resulting in the tightening of spreads in that market to historically tight levels.

Keywords

• high yield mutual funds
• liquidity risk
• serial correlation model
• lagged effect model
• portfolio liquidity
• covid-19 pandemic
• g12
• g23