Review of Finance 2026
Large Funds and Corporate Bond Market Fragility
Abstract
The corporate bond fund industry is characterized by a high concentration of capital, with a substantial portion of assets managed by large funds. We examine the relation between large-fund trading exposure and corporate bond volatility across market conditions. Using a comprehensive sample of U.S. bond funds and corporate bonds, we show that bond return volatility decreases (increases) with trading fund size when market liquidity is high (low). Exploring the underlying mechanisms, we find that large funds are more likely to reach for yield by holding illiquid bonds. Further analysis suggests that while large funds supply liquidity during normal times, their liquidity-supplying activity weakens during market stress. Finally, large funds tend to sell illiquid bonds when facing investor outflows during illiquid markets. Overall, our findings reveal an important yet subtle relation between fund size and bond market fragility, akin to a “dam effect.”
- DOI
- 10.1093/rof/rfag053
- Language
- en
- Sources
- crossref