Mutual Fund Trading Style and Bond Market Fragility

Review of Financial Studies, forthcoming

71 Pages Posted: 19 Jul 2017 Last revised: 8 Jun 2020

See all articles by Amber Anand

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: May 7, 2020

Abstract

We explore the link between mutual funds and fragility risk in the corporate bond market. We classify a fund’s trading style based on its responses to signals of large dealer inventories. Trading style is persistent and the majority of funds demand liquidity. Notably, a subset of funds earn positive alpha by intentionally supplying liquidity during periods of sustained customer selling (with transitory price effects). Liquidity supplying funds maintain their relative trading style when facing large outflows and elevated market stress, thus alleviating fragility risk. Our results add nuance to existing evidence that mutual funds pose a threat to market stability.

Keywords: Corporate bonds; dealers; mutual funds; fragility; liquidity; performance

JEL Classification: G10; G20

Suggested Citation

Anand, Amber and Jotikasthira, Chotibhak and Venkataraman, Kumar, Mutual Fund Trading Style and Bond Market Fragility (May 7, 2020). Review of Financial Studies, forthcoming, 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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