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

38 Pages Posted: 19 Jul 2017  

Amber Anand

Syracuse University - Whitman School of Management

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Kumar Venkataraman

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: July 15, 2017

Abstract

This study presents new evidence on buy-side institutions as a channel of liquidity supply in the corporate bond market. Using bond transactions data, we aggregate the inventory positions of bond dealers, and identify inventory cycles. We classify a bond fund’s trading style as liquidity supplying (demanding) if the changes in bond holdings exhibit a propensity to absorb (further strain) the aggregate dealer positions. Between 2003 and 2014, bond funds on average tend to demand liquidity; however, trading styles vary across bond funds and are persistent over time. Higher flexibility in portfolio holdings is associated with a liquidity supplying trading style. A liquidity supplying trading style earns higher future fund returns after controlling for portfolio attributes and factor risk exposures. These results suggest that trading style contains useful information for investors in selecting bond funds and that bond market liquidity can be enhanced by developing platforms that facilitate participation by buy-side institutions.

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

Suggested Citation

Anand, Amber and Jotikasthira, Chotibhak and Venkataraman, Kumar, Do Buy-Side Institutions Supply Liquidity in Bond Markets? Evidence from Mutual Funds (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=3003189

Amber Anand

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244
United States

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-7005 (Phone)
214-768-4099 (Fax)

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

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