Does mutual fund illiquidity introduce fragility into asset prices? Evidence from the corporate bond market

Hao Jiang, Yi Li, Zheng Sun and Ashley Wang

Journal of Financial Economics, 2022, vol. 143, issue 1, 277-302

Abstract: Open-end corporate bond mutual funds invest in illiquid assets while providing liquid claims to shareholders. Does such liquidity transformation introduce fragility to the corporate bond market? To address this question, we create a novel bond-level latent fragility measure based on asset illiquidity of mutual funds holding the bond. We find that corporate bonds bearing higher fragility subsequently experience higher return volatility and more outflows-induced mutual fund selling over the period of 2006–2019. Using the COVID-19 crisis as a natural experiment, we find that bonds with higher precrisis fragility experienced more negative returns and larger reversals around March 2020.

JEL-codes: G10 G12 G20 G23 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:277-302

DOI: 10.1016/j.jfineco.2021.05.022

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