Title

Do Buy-Side Institutions Supply Liquidity in Bond Markets? Evidence from Mutual Funds

Publication Date

7-19-2017

Abstract

This study presents new evidence on buy-side institutions as a channel of liquidity supply in the corporate bond market. Using bond transactions data, we aggregate the inventory positions of bond dealers, and identify inventory cycles. We classify a bond fund’s trading style as liquidity supplying (demanding) if the changes in bond holdings exhibit a propensity to absorb (further strain) the aggregate dealer positions. Between 2003 and 2014, bond funds on average tend to demand liquidity; however, trading styles vary across funds and are persistent over time. Funds with higher flexibility in portfolio holdings and less volatile investor flows are associated with liquidity supply. Trading style that is liquidity supplying is associated with higher fund performance implying that bond funds have a market incentive to respond to dealer positions. Our results suggest that bond trading platforms should facilitate participation by buy-side institutions to enhance liquidity.?

Document Type

Article

Keywords

Bond liquidity; buy-side institutions; dealer inventory; mutual funds; fund performance.

Disciplines

Finance

DOI

10.2139/ssrn.3003189

Source

SMU Cox: Finance (Topic)

Language

English

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