Mutual Fund Holdings of Credit Default Swaps: Liquidity, Yield, and Risk Taking

68 Pages Posted: 16 Jan 2015 Last revised: 7 Sep 2016

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics

Zhongyan Zhu

Monash University

Date Written: September 1, 2016

Abstract

Using mutual funds quarterly holdings of credit default swap (CDS) contracts from pre- to post-financial crisis, we analyze the motives for and consequences of funds' CDS investment. Funds resort to CDS selling when facing unpredictable liquidity needs and when the CDS security is liquid relative to the underlying bond, and to CDS buying as part of a "negative basis trade" when the bond is illiquid. Funds CDS strategies tilt toward yield enhancement, and smaller funds follow leading funds in risk taking. The reference entities that attracted the highest selling interest from the large funds were disproportionately large financial institutions.

Keywords: CDS, Mutual Funds, liquidity, systemic risk

Suggested Citation

Jiang, Wei and Zhu, Zhongyan, Mutual Fund Holdings of Credit Default Swaps: Liquidity, Yield, and Risk Taking (September 1, 2016). Columbia Business School Research Paper No. 15-9. Available at SSRN: https://ssrn.com/abstract=2549996 or http://dx.doi.org/10.2139/ssrn.2549996

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

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