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Fire Sales and Impediments to Liquidity Provision in the Corporate Bond Market

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  • Wang, Z. Jay
  • Zhang, Hanjiang
  • Zhang, Xinde

Abstract

We examine impediments to liquidity provision by mutual funds to insurance companies during corporate bond fire sales. We find that financial regulation and limited capital capacity significantly affect liquidity provision. Mutual funds reduced their purchase of fire-sale bonds following regulatory changes after the 2008–2009 financial crisis. Funds facing more capital constraints (proxied by smaller cash and Treasury holdings, less liquid corporate bond investments, higher redemption risk, and less active investment styles) provide less liquidity. Mutual funds actively investing in fire-sale bonds earn significant returns from liquidity provision and demonstrate superior overall skills in corporate bond investments.

Suggested Citation

  • Wang, Z. Jay & Zhang, Hanjiang & Zhang, Xinde, 2020. "Fire Sales and Impediments to Liquidity Provision in the Corporate Bond Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(8), pages 2613-2640, December.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:8:p:2613-2640_7
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    Cited by:

    1. Huang, Alan Guoming & Wermers, Russ & Xue, Jinming, 2023. ""Buy the rumor, sell the news": Liquidity provision by bond funds following corporate news events," CFR Working Papers 23-07, University of Cologne, Centre for Financial Research (CFR).

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