Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds
64 Pages Posted: 8 Jul 2021 Last revised: 12 Jan 2023
Date Written: January 11, 2023
Abstract
This paper investigates how climate-related risks affect the trading behavior of bond mutual funds and tests the underlying mechanisms. We find that mutual funds collectively sell corporate bonds issued by firms with high carbon emissions, driven by funds’ concerns about carbon-related redemption risks, rather than by a permanent shift in funds’ investing preferences. Higher carbon exposures in mutual fund portfolios lead to more investor outflows, and bonds tend to experience more intensive selling if their holding mutual funds have higher flow-to-carbon sensitivity. Bonds issued by high-carbon firms experience worse liquidity conditions, especially when concerns about carbon-related risks heighten.
Keywords: Climate risks, carbon emissions, corporate bonds, mutual funds, redemption risks, liquidity
JEL Classification: G11, G20, G23, G41
Suggested Citation: Suggested Citation