Dynamic Liquidity Preferences of Mutual Funds
University of Illinois at Urbana-Champaign - Department of Finance
June 15, 2015
AFA 2009 San Francisco Meetings Paper
EFA 2008 Athens Meetings Paper
Second Singapore International Conference on Finance 2008
This paper examines the relation between expected market volatility and open-end mutual funds' liquidity preferences. Using a large panel of actively managed U.S. equity mutual funds, I show that mutual fund managers hold more cash and tilt their holdings more heavily towards liquid stocks during periods when expected market volatility is high. Cross-sectional tests suggest that the dynamic preferences for liquidity are driven by concerns over investor withdrawals during volatile times. Furthermore, I find evidence that this type of dynamic behavior leads to higher fund returns.
Number of Pages in PDF File: 47
Keywords: Mutual funds, liquidity, expected volatility, performance, market timing
JEL Classification: G11, G20, G30
Date posted: March 19, 2008 ; Last revised: June 5, 2015
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