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Dynamic Liquidity Preferences of Mutual Funds
Jiekun Huang National University of Singapore (NUS) - Department of Finance & Accounting December 7, 2009 AFA 2009 San Francisco Meetings Paper EFA 2008 Athens Meetings Paper Second Singapore International Conference on Finance 2008 Abstract: I examine the relationship between expected market volatility and the demand for liquidity in open-end mutual funds. I find that fund managers hold more cash and tilt their holdings more heavily toward liquid stocks when the market is expected to be more volatile. This dynamic preference for liquidity is more pronounced among low-load funds, funds whose past performance has been unfavorable, funds with high return volatility, small funds, growth-oriented funds, and high-turnover funds. I further show that this type of behavior is valuable for fund investors during high volatility periods because it has led to significantly (both statistically and economically) higher subsequent abnormal returns.
Keywords: Mutual funds, liquidity, expected volatility, performance JEL Classifications: G11, G20, G30 Working Paper SeriesDate posted: March 19, 2008 ; Last revised: December 11, 2009Suggested CitationContact Information
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