Mutual Fund Flight-to-Liquidity

98 Pages Posted: 7 Feb 2017 Last revised: 13 Jun 2022

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University - Schulich School of Business

Date Written: October 5, 2017

Abstract

This paper empirically investigates a demand-side channel through which market uncertainty affects the liquidity premium. Using data at the mutual fund level, I document that fund managers actively shift the composition of their portfolio toward more liquid assets during high volatility periods. I argue that the increased demand for liquidity in times of market stress stems from a threat of strategic complementarities among investors. Aggregated over many funds, this `flight-to-liquidity' places a significant upward price pressure on the liquidity premium: a one standard deviation increase in my measure of active liquidity management yields 4.004pp increase in annualized reversal strategy return.

Keywords: Market uncertainty, financial crisis, liquidity, flight-to-liquidity, mutual funds, institutional investors, price pressure, systematic risk, strategic complementarities

JEL Classification: G01, G11, G23

Suggested Citation

Rzeźnik, Aleksandra, Mutual Fund Flight-to-Liquidity (October 5, 2017). Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=2912368 or http://dx.doi.org/10.2139/ssrn.2912368

Aleksandra Rzeźnik (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
361
Abstract Views
2,263
Rank
151,741
PlumX Metrics