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

53 Pages Posted: 23 Feb 2016

See all articles by Zhongyan Zhu

Zhongyan Zhu

Monash University

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER


Using a comprehensive dataset of mutual funds’ quarterly holdings of credit default swap (CDS) contracts during 2007-2011, we analyze the motives for and consequences of mutual funds’ participation in the CDS market pre- and post-financial crisis. Consistent with theoretical work, funds resort to CDS (especially selling) when they face unpredictable liquidity needs and when the CDS securities are liquid, relative to the underlying bonds. Funds also take advantage of the negative basis between CDS and bond yields, especially for the relatively illiquid bonds. Smaller funds follow leading funds in initiating CDS contracts on new reference entities. Moreover, the reference entities that attracted the highest-selling interests from the largest mutual funds are disproportionately firms that were perceived to be “too large to fail” or “too systemic to fail.”

Suggested Citation

Zhu, Zhongyan and Jiang, Wei, Mutual Fund Holdings of Credit Default Swaps: Liquidity Management and Risk Taking. Melbourne Business School, 2016 Financial Institutions, Regulation & Corporate Governance (FIRCG) Conference, Columbia Business School Research Paper No. 16-21, Available at SSRN: or

Zhongyan Zhu (Contact Author)

Monash University ( email )

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


Wei Jiang

Columbia Business School - Finance and Economics ( email )

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

ECGI ( email )

c/o the Royal Academies of Belgium
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NBER ( email )

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