Work

Mutual Fund Trading Style and Bond Market Fragility

Year: 2020

Type: article

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.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhaa120

Authors: Amber Anand, Chotibhak Jotikasthira, Kumar Venkataraman

Institutions: Syracuse University, Southern Methodist University

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3036413629

FWCI: 8.58

Cites: 56

Cited by: 66

Related to: 10