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

61 Pages Posted: 18 Sep 2020 Last revised: 11 Aug 2023

See all articles by Efe Cotelioglu

Efe Cotelioglu

American University of Sharjah

Date Written: November 29, 2019


This paper investigates the impact of growing ownership of fixed-income ETFs and mutual funds on the commonality in liquidity across corporate bonds. The unpredictability of liquidity demands inherent in these funds can prompt correlated trading among underlying illiquid bonds. The empirical results reveal a positive and significant relationship between ETF ownership and liquidity commonality in investment-grade bonds, indicating that ETFs curtail opportunities for liquidity risk diversification. Conversely, mutual fund ownership does not impact bond liquidity co-movement, a feature that distinctly differentiates it from equity markets. The paper identifies three pivotal mechanisms that help explain the disparate impact of ETFs and mutual funds: correlated trading stimulated by fund flows, differences in investor clienteles, and the influence of ETF arbitrage activity.

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

JEL Classification: G12, G14, G20

Suggested Citation

Cotelioglu, 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: or

Efe Cotelioglu (Contact Author)

American University of Sharjah ( email )

P.O. Box 26666
United Arab Emirates

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