References (53)



Does Liquidity Beta Predict Mutual-Fund Alpha?

Xi Dong

INSEAD - Finance

Shu Feng

Boston University

Ronnie Sadka

Boston College - Carroll School of Management

February 6, 2013

AEA 2012 Chicago Meetings Paper

This paper demonstrates that the systematic liquidity-risk exposures of mutual funds can predict outperformance in the cross-section. Funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually over the period 1984-2009. Four possible explanations for this effect are tested: (a) liquidity-risk premium; (b) managerial skill; (c) funding-liquidity premium; and (d) cost-based explanations including funds' liquidity levels, transaction costs, and operational costs. We find that the liquidity-risk premium of fund holdings explains only a small portion of the effect. Evidence suggests that the remaining portion is more likely due to managerial ability in generating abnormal performance than to the other explanations.

Number of Pages in PDF File: 56

Keywords: Liquidity risk, Finanical Institutions, Price impact, Asset pricing

JEL Classification: G12, G14

working papers series

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Date posted: March 15, 2011 ; Last revised: November 17, 2014

Suggested Citation

Dong, Xi and Feng, Shu and Sadka, Ronnie, Does Liquidity Beta Predict Mutual-Fund Alpha? (February 6, 2013). 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)
INSEAD - Finance ( email )
Boulevard de Constance
77305 Fontainebleau Cedex
HOME PAGE: http://www.insead.edu/facultyresearch/faculty/profiles/xdong/

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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References:  53

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