Abstract

http://ssrn.com/abstract=1785561
 
 

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Liquidity Risk and Mutual Fund Performance


Xi Dong


CUNY Baruch College; INSEAD - Finance

Shu Feng


Boston University

Ronnie Sadka


Boston College - Carroll School of Management

December 6, 2014

AEA 2012 Chicago Meetings Paper

Abstract:     
The liquidity risk exposure of mutual funds represents their propensity for taking risk, but can also signify skill, if skillful managers' ability to outperform increases with market liquidity. Consistently, we document an annual liquidity-beta performance spread of 3.3% to 4% in the cross-section of mutual funds. Only a small portion of this spread is explained by risk premia. Instead, a large part is driven by the ability of high-liquidity-beta funds to outperform, either through holding underpriced assets or making informed trades, during periods of improved market liquidity. The findings highlight the multiple effects of liquidity risk on active asset management.

Number of Pages in PDF File: 68

Keywords: Liquidity Risk, Mispricing, Informed Trading, Mutual Fund

JEL Classification: G12, G14, G20, G23

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Date posted: March 15, 2011 ; Last revised: December 7, 2014

Suggested Citation

Dong, Xi and Feng, Shu and Sadka, Ronnie, Liquidity Risk and Mutual Fund Performance (December 6, 2014). AEA 2012 Chicago Meetings Paper . Available at SSRN: http://ssrn.com/abstract=1785561 or http://dx.doi.org/10.2139/ssrn.1785561

Contact Information

Xi Dong (Contact Author)
CUNY Baruch College ( email )
17 Lexington Avenue
New York, NY 10021
United States
HOME PAGE: http://aux.zicklin.baruch.cuny.edu/dong/
INSEAD - Finance ( email )
Boulevard de Constance
77305 Fontainebleau Cedex
France

Shu Feng
Boston University ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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