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

60 Pages Posted: 16 Jan 2015 Last revised: 5 Aug 2020

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Jitao Ou

Hong Kong Baptist University

Zhongyan Zhu

Monash University

Date Written: August 4, 2020

Abstract

This study analyzes the motives for and consequences of funds’ credit default swap (CDS) investments using mutual funds’ quarterly holdings from pre- to post-financial crisis. Funds resort to CDS investment when facing unpredictable liquidity needs. Funds sell more in reference entities where CDS is liquid relative to the underlying bonds and buy more when the CDS-bond basis is more negative. To enhance yield, funds engage in negative basis trading and sell CDS with the highest spreads within rating categories, and with spreads higher than those of their bond portfolios. Funds with superior portfolio returns also demonstrate more skills in CDS trading.

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 (August 4, 2020). Journal of Finance Forthcoming, 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
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ECGI ( email )

c/o the Royal Academies of Belgium
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Belgium

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Jitao Ou

Hong Kong Baptist University ( email )

Kowloon Tong
Hong Kong
Hong Kong

Zhongyan Zhu (Contact Author)

Monash University ( email )

Department of Banking and Finance
Caufield East, Victoria 3145
Australia
61-3-9903-4546 (Phone)

HOME PAGE: http://johnchungyenchu.org/

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