Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund Investors
Indiana University - Kelley School of Business, Department of Finance
November 14, 2013
We study the price dynamics and institutional investor trading decisions in the U.S. equity markets during flight-to-liquidity episodes. We find clear evidence that mutual funds, on aggregate, reduce their holdings of illiquid stocks. This is a result of larger withdrawals from funds that hold less liquid stocks. Additional tests suggest that these withdrawals have a direct price pressure that contributes to the decline in illiquid stocks prices. The finding that mutual funds are forced to sell illiquid stocks in response to investor outflows suggests a channel through which liquidity serves as a priced risk factor.
Number of Pages in PDF File: 64
Keywords: market uncertainty, financial crisis, liquidity, flight-to-liquidity, mutual funds, institutional investors, price pressure
JEL Classification: G01, G11, G12, G14, G20working papers series
Date posted: July 16, 2012 ; Last revised: November 15, 2013
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