Publication: Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds
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Date
2021-07-08
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Abstract
This paper investigates the effect of climate risks on corporate bond mutual funds’ trading activities and explores its mechanism. We find that investor flows negatively respond to mutual funds’ carbon exposure, leveraging the Paris Agreement as a shock. Such carbon-induced redemptions prompt mutual funds to sell bonds issued by high-carbon companies, especially the bonds held by funds with higher outflow-to-carbon sensitivity. We rule out the alternative hypothesis that a fundamental shift in funds’ investment preferences drives the reduction in high-carbon holdings. Moreover, we note a deterioration in the liquidity of high-carbon bonds, particularly those heavily owned by mutual funds.
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Attribution-NonCommercial-NoDerivatives 4.0 International
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IE Business School
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Cao, J., Li, Y., Zhan, X., Zhang, W. E., & Zhou, L. L. (2023). Carbon emissions, mutual fund trading, and the liquidity of corporate bonds. Mutual Fund Trading, and the Liquidity of Corporate Bonds (January 11, 2023). http://dx.doi.org/10.2139/ssrn.3881497.