Does Liquidity Beta Predict Mutual-Fund Alpha?
INSEAD - Finance
Boston College - Carroll School of Management
July 9, 2014
The liquidity risk exposure of mutual funds represents their propensity for taking risk, but can also signify managerial skill, as long as skillful managers’ ability to outperform increases with market liquidity. We document an annual liquidity-beta performance spread of 3.3% in the cross-section of mutual funds. Only a small portion of this spread is explained by risk premia. Instead, it is mostly driven by the ability of high-liquidity-beta funds to outperform, either through holding underpriced assets or making more informed trades, during periods of improved market liquidity. The findings highlight the multi-facet role of liquidity risk in mutual-fund performance evaluation.
Number of Pages in PDF File: 50
Keywords: Liquidity risk, Finanical institutions, Price impact, Asset pricing
JEL Classification: G12, G14working papers series
Date posted: March 15, 2011 ; Last revised: July 9, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
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