'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
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.
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