Mutual fund trading style and bond market fragility

Amber Anand, Chotibhak Jotikasthira, Kumar Venkataraman

Research output: Contribution to journalArticlepeer-review

Abstract

We explore the link between mutual funds and fragility risk in the corporate bond market. We classify a fund's trading style based on its responses to signals of large dealer inventories. Trading style is persistent and the majority of funds demand liquidity. Notably, a subset of funds earn positive alpha by intentionally supplying liquidity during periods of sustained customer selling (with transitory price effects). Liquidity-supplying funds maintain their relative trading style when facing large outflows and elevated market stress, thus alleviating fragility risk. Our results add nuance to existing evidence that mutual funds pose a threat to market stability.

Original languageEnglish (US)
Pages (from-to)2993-3044
Number of pages52
JournalReview of Financial Studies
Volume34
Issue number6
DOIs
StatePublished - Jun 1 2021

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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