Fragile Market: The impact of mutual funds on the corporate bond market

Abstract: This master's thesis investigates whether mutual funds can induce fire sales on the Swedish corporate bond market between August 2019 and August 2020 to determine whether mutual funds aggravated the COVID-19 crash, and if their solution to temporarily freeze withdrawals were a viable remedy. Moreover, the thesis addresses this question using a panel-data framework that includes mutual fund-specific variables, control variables suggested by previous literature, entity, and time-fixed effects, allowing the thesis to capture divergences between corporate bonds and months. The key conclusions are that mutual fund flows can cause fire sales on the Swedish corporate bond market, with the effect on return being -50bps on average. In addition, the remaining fund-specific variables have a detrimental impact on returns. When evaluating the characteristic adjusted return, fire sales have an even more significant impact, as corporate bonds with fire sales underperform their sector by -70bps on average. Meanwhile, the study discovers that proxies for market liquidity and volatility have an adverse impact on returns.