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 language | English (US) |
|---|---|
| Pages (from-to) | 2993-3044 |
| Number of pages | 52 |
| Journal | Review of Financial Studies |
| Volume | 34 |
| Issue number | 6 |
| DOIs | |
| State | Published - Jun 1 2021 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics