Abstract

http://ssrn.com/abstract=1785561
 
 

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Does Liquidity Beta Predict Mutual-Fund Alpha?


Xi Dong


INSEAD - Finance

Shu Feng


Boston University

Ronnie Sadka


Boston College - Carroll School of Management

July 9, 2014


Abstract:     
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, G14

working papers series


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Date posted: March 15, 2011 ; Last revised: July 9, 2014

Suggested Citation

Dong, Xi and Feng, Shu and Sadka, Ronnie, Does Liquidity Beta Predict Mutual-Fund Alpha? (July 9, 2014). 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
France
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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