'Buy the Rumor, Sell the News': Liquidity Provision by Bond Funds Following Corporate News Events

Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023

SMU Cox School of Business Research Paper No. 22-06

59 Pages Posted: 14 Feb 2022 Last revised: 6 Mar 2024

See all articles by Alan Guoming Huang

Alan Guoming Huang

University of Waterloo

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Jinming Xue

Southern Methodist University (SMU) - Finance Department

Date Written: September 19, 2022

Abstract

Using a comprehensive database of corporate news, we examine how bond mutual funds trade on the sentiment of news releases. We find that bond funds trade against the direction of news sentiment (e.g., selling after good news about a firm). The results are more pronounced in bonds that lie within a fund’s investment objective sector, and in bonds with high turnover and low information asymmetry, and in credit-rating news and news with positive sentiment. Funds that most frequently trade against news sentiment produce a higher alpha, and a source of such alpha is bond price reversals post news events. Fixed income mutual funds, dealers, and insurance companies complement each other in news trading, with mutual funds trading against news largely in the absence of dealers. Our study indicates that bond mutual funds represent a significant liquidity provider, upon corporate news events, in the market for corporate bonds.

Suggested Citation

Huang, Alan G. and Wermers, Russell R. and Xue, Jinming, 'Buy the Rumor, Sell the News': Liquidity Provision by Bond Funds Following Corporate News Events (September 19, 2022). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, SMU Cox School of Business Research Paper No. 22-06, Available at SSRN: https://ssrn.com/abstract=3980151 or http://dx.doi.org/10.2139/ssrn.3980151

Alan G. Huang

University of Waterloo ( email )

School of Accounting and Finance
Waterloo, Ontario N2L 3G1
Canada
519-888 4567 ext. 36770 (Phone)

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://terpconnect.umd.edu/~wermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jinming Xue (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
(214)-768-4181 (Phone)

HOME PAGE: http://sites.google.com/view/jinming-xue

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