AFA 2016 San Francisco
62 Pages Posted: 22 Nov 2014 Last revised: 16 Dec 2016
Date Written: November 23, 2016
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: 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