Mutual Fund Trading Style and Bond Market Fragility

Amber Anand, Chotibhak Jotikasthira and Kumar Venkataraman

The Review of Financial Studies, 2021, vol. 34, issue 6, 2993-3044

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.

JEL-codes: G10 G12 G20 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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