Do Buy-Side Institutions Supply Liquidity in Bond Markets? Evidence from Mutual Funds

65 Pages Posted: 19 Jul 2017 Last revised: 13 Jul 2018

Amber Anand

Syracuse University - Whitman School of Management

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: July 11, 2018

Abstract

We examine the role of buy-side institutions as liquidity suppliers in bond markets. Focusing on mutual funds, we classify a fund’s trading style as liquidity supplying (demanding) if the fund helps absorb (strain) dealers’ inventory. While mutual funds in aggregate demand liquidity, persistent cross-sectional variation exists – stable funding, family affiliation with dealers, and fund manager skill are associated with liquidity supply. Liquidity supplying trading style earns higher alpha, especially in illiquid markets. Our evidence suggests that bond market liquidity can be enhanced by removing institutional frictions that impede broad investor participation in liquidity provision.

Keywords: Bond liquidity; buy-side institutions; dealer inventory; mutual funds; fund performance.

JEL Classification: G10; G20

Suggested Citation

Anand, Amber and Jotikasthira, Chotibhak and Venkataraman, Kumar, Do Buy-Side Institutions Supply Liquidity in Bond Markets? Evidence from Mutual Funds (July 11, 2018). 28th Annual Conference on Financial Economics and Accounting; SMU Cox School of Business Research Paper No. 18-5. Available at SSRN: https://ssrn.com/abstract=3003189 or http://dx.doi.org/10.2139/ssrn.3003189

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Finance Department ( email )

United States

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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