Do Mutual Funds and ETFs Affect the Commonality in Liquidity of Corporate Bonds?

58 Pages Posted: 18 Sep 2020 Last revised: 3 Nov 2020

See all articles by Efe Çötelioğlu

Efe Çötelioğlu

Swiss Finance Institute; USI Lugano

Date Written: November 29, 2019


The paper studies the effect of growing mutual fund and ETF ownership on the commonality in liquidity of underlying bonds. Unpredictable liquidity needs of funds may give rise to correlated trading across underlying illiquid bonds. I document that there is a positive and significant relationship between ETF ownership and liquidity commonality of investment-grade bonds suggesting that ETFs reduce the possibility to diversify liquidity risk. In contrast, and unlike for equities, mutual fund ownership does not affect the co-movement in liquidity of bonds. I show that three channels explain the differential impact of ETFs and mutual funds: flow-driven correlated trading, different investor clienteles, and ETF arbitrage activity.

Keywords: Corporate Bonds, Liquidity, Commonality, Arbitrage, Exchange-Traded Funds (ETFs), Mutual Funds

JEL Classification: G12, G14, G20

Suggested Citation

Çötelioğlu, Efe, Do Mutual Funds and ETFs Affect the Commonality in Liquidity of Corporate Bonds? (November 29, 2019). Swiss Finance Institute Research Paper No. 20-81, Available at SSRN:

Efe Çötelioğlu (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

USI Lugano ( email )

Via Buffi 13
CH-6900 Lugano

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