'Buy the Rumor, Sell the News': Liquidity Provision by Bond Funds Following Corporate News Events
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 low information asymmetry and bonds with positive-sentiment news. Funds that most frequently trade against news sentiment produce a higher alpha, and a source of such alpha is bond price reversals subsequent to such news. Fixed income mutual funds, dealers, and insurance companies complement each other in news trading, with insurance companies trading with the news, while dealers, similar to mutual funds, trading against the news. Our study indicates that bond mutual funds represent a significant liquidity provider, upon corporate news events, in the market for corporate bonds.
SMU Cox: Finance (Topic)