Liquidity Style of Mutual Funds
Ibbotson Associates - A Morningstar Company
James X. Xiong
Roger G. Ibbotson
Yale School of Management; Zebra Capital Management, LLC
February 10, 2012
Recent literature indicates that a liquidity investment style – the process of investing in relatively less liquid stocks within the liquid universe of publicly traded stocks – has led to excess returns relative to size and value. While previously documented at the security level, we examine whether this style can be uncovered at the mutual fund level. In aggregate and across a wide range of mutual fund categories, we find that on average mutual funds that held less liquid stocks significantly outperformed mutual funds that held more liquid stocks. This demonstrates that the liquidity premium is sufficiently strong to show up in portfolios where the managers are most likely not directly focusing on liquidity. Surprisingly, the outperformance of the mutual funds that held less liquid stocks was primarily due to superior performance in down markets, especially market crashes.
Number of Pages in PDF File: 18
Keywords: Liquidity, Stocks, Portfolio Management, Mutual Funds
JEL Classification: D40, D46, G00, G10, G11, G12
Date posted: March 28, 2011 ; Last revised: February 17, 2012
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