Fire Sales and Impediments to Liquidity Provision in the Corporate Bond Market

44 Pages Posted: 16 Aug 2015 Last revised: 29 Jul 2019

See all articles by Zhi Jay Wang

Zhi Jay Wang

University of Oregon - Charles H. Lundquist School of Business

Hanjiang Zhang

Washington State University - Carson College of Business

Xinde Zhang

University of Arkansas - Department of Finance

Date Written: July 25, 2019

Abstract

We examine impediments to liquidity provision by mutual funds to insurance companies during corporate bond fire sales. We find that financial regulation and limited capital capacity significantly affect liquidity provision. Mutual funds reduced their purchase of fire sale bonds following regulatory changes after the 2008-2009 financial crisis. Funds facing more capital constraints (proxied by smaller cash and treasury holdings, less liquid corporate bond investments, higher redemption risk, and less active investment styles) provide less liquidity. Mutual funds actively investing in fire sale bonds earn significant returns from liquidity provision and demonstrate superior overall skills in corporate bond investments.

Keywords: Fire Sales, Liquidity Provision, Corporate-Bond Mutual Funds

JEL Classification: G1, G2

Suggested Citation

Wang, Zhi Jay and Zhang, Hanjiang and Zhang, Xinde, Fire Sales and Impediments to Liquidity Provision in the Corporate Bond Market (July 25, 2019). Available at SSRN: https://ssrn.com/abstract=2644098 or http://dx.doi.org/10.2139/ssrn.2644098

Zhi Jay Wang (Contact Author)

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Hanjiang Zhang

Washington State University - Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Xinde Zhang

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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