Mutual fund holdings of credit default swaps: liquidity, yield, and risk

Wei Jiang, Jitao Ou, Zhongyan Zhu

Research output: Contribution to journalArticleResearchpeer-review

8 Citations (Scopus)


This study analyzes the motivations for and consequences of funds' credit default swap (CDS) investments using mutual funds' quarterly holdings from pre- to postfinancial crisis. Funds invest in CDS when facing unpredictable liquidity needs. Funds sell more in reference entities when the CDS is liquid relative to the underlying bonds and buy more when the CDS-bond basis is more negative. To enhance yield, funds engage in negative basis trading and sell CDS with the highest spreads within rating categories, and with spreads higher than those of their bond portfolios. Funds with superior portfolio returns also demonstrate more skill in CDS trading.

Original languageEnglish
Pages (from-to)537-586
Number of pages50
JournalJournal of Finance
Issue number2
Publication statusPublished - Apr 2021

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