Articlegreen2020

Mutual Fund Trading Style and Bond Market Fragility

Amber Anand · Chotibhak Jotikasthira · Kumar Venkataraman

66 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Banking stability, regulation, efficiency Credit Risk and Financial Regulations

Abstract

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.

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References

1998Costly Search and Mutual Fund Flows 1997Risk Taking by Mutual Funds as a Response to Incentives 2005Asset Fire Sales (and Purchases) in Equity Markets 2009How Active Is Your Fund Manager? A New Measure That Predicts Performance 1988Liquidity and Market Structure 1978THE SUPPLY OF DEALER SERVICES IN SECURITIES MARKETS 2011The Illiquidity of Corporate Bonds 2007Corporate Bond Market Transaction Costs and Transparency

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