Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds

64 Pages Posted: 8 Jul 2021 Last revised: 12 Jan 2023

See all articles by Jie Cao

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance

Yi Li

Board of Governors of the Federal Reserve System

Xintong Zhan

Department of Finance, School of Management, Fudan University

Weiming Elaine Zhang

IE Business School - IE University

Linyu (Lucy) Zhou

The Hong Kong Polytechnic University, School of Accounting and Finance

Date Written: January 11, 2023

Abstract

This paper investigates how climate-related risks affect the trading behavior of bond mutual funds and tests the underlying mechanisms. We find that mutual funds collectively sell corporate bonds issued by firms with high carbon emissions, driven by funds’ concerns about carbon-related redemption risks, rather than by a permanent shift in funds’ investing preferences. Higher carbon exposures in mutual fund portfolios lead to more investor outflows, and bonds tend to experience more intensive selling if their holding mutual funds have higher flow-to-carbon sensitivity. Bonds issued by high-carbon firms experience worse liquidity conditions, especially when concerns about carbon-related risks heighten.

Keywords: Climate risks, carbon emissions, corporate bonds, mutual funds, redemption risks, liquidity

JEL Classification: G11, G20, G23, G41

Suggested Citation

Cao, Jie and Li, Yi and Zhan, Xintong and Zhang, Weiming Elaine and Zhou, Linyu, Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds (January 11, 2023). Available at SSRN: https://ssrn.com/abstract=3881497 or http://dx.doi.org/10.2139/ssrn.3881497

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/jiejaycao

Yi Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

HOME PAGE: http://sites.google.com/view/yili/

Xintong Zhan

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

Weiming Elaine Zhang

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Linyu Zhou

The Hong Kong Polytechnic University, School of Accounting and Finance ( email )

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