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Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns

62 Pages Posted: 22 Nov 2014 Last revised: 16 Dec 2016

Erkko Etula

Independent

Kalle Rinne

Luxembourg School of Finance

Matti Suominen

Aalto University School of Business

Lauri Vaittinen

Independent

Date Written: November 23, 2016

Abstract

We present broad-based evidence that the monthly cash needs of institutions induce systematic patterns in global stock returns. First, we document strong reversals in stock index returns around the last monthly trading day that guarantees cash settlement before month end. Second, we present direct evidence that links these reversals to institutional trading activity, fund flows and funding conditions. Third, we find that the reversals are stronger for larger and more liquid stocks, and those more commonly held by mutual funds, a popular implementation vehicle among institutions. Finally, we show that mutual funds’ sensitivity to month-end reversals predicts their performance.

Keywords: asset pricing, limits of arbitrage, mutual funds, short-term reversals, turn-of-the-month effect

JEL Classification: G10, G12, G13

Suggested Citation

Etula, Erkko and Rinne, Kalle and Suominen, Matti and Vaittinen, Lauri, Dash for Cash: Month-End Liquidity Needs and the Predictability of Stock Returns (November 23, 2016). AFA 2016 San Francisco; Finance Down Under 2016 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2528692 or http://dx.doi.org/10.2139/ssrn.2528692

Erkko Etula

Independent ( email )

No Address Available

Kalle Rinne

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

Lauri Tapani Vaittinen

Independent ( email )

No Address Available

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