Does Liquidity Beta Predict Mutual-Fund Alpha?
INSEAD - Finance
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, G14working papers series
Date posted: March 15, 2011 ; Last revised: May 27, 2013
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.532 seconds