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

80 Pages Posted: 16 Jan 2015 Last revised: 19 Dec 2019

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics

Jitao Ou

Hong Kong Baptist University

Zhongyan Zhu

Monash University

Date Written: November 26, 2019

Abstract

This study analyzes the motives for and consequences of funds’ CDS investments using mutual funds’ quarterly holdings of credit default swap (CDS) contracts from pre- to post-financial crisis periods. Funds resort to CDS investment when they face unpredictable liquidity needs. Funds sell more CDS in reference entities where CDS is liquid relative to the underlying bonds and buy more CDS when the CDS-bond basis is more negative. Funds’ CDS investment does not lead to superior risk-adjusted returns but enhances yield, by engaging in negative basis trading and selling CDS securities with credit spreads higher than those of their bond portfolios.

Keywords: credit default spread (CDS), mutual funds, liquidity management, reach for yield, risk-taking

JEL Classification: G20, G23

Suggested Citation

Jiang, Wei and Ou, Jitao and Zhu, Zhongyan, Mutual Fund Holdings of Credit Default Swaps: Liquidity, Yield, and Risk (November 26, 2019). 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)

Jitao Ou

Hong Kong Baptist University ( email )

Kowloon Tong
Hong Kong
Hong Kong

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
395
Abstract Views
2,049
rank
56,330
PlumX Metrics