Commonality in Liquidity: A Demand-Side Explanation

34 Pages Posted: 23 Mar 2009

See all articles by Andrew Koch

Andrew Koch

University of Texas at Austin - Department of Finance

Stefan Ruenzi

University of Mannheim - Department of International Finance

Laura T. Starks

University of Texas at Austin - Department of Finance

Date Written: March 18, 2009

Abstract

We hypothesize that a source of commonality in a stock's liquidity arises from correlated trading among the stock's investors. In support of this hypothesis, we find that stocks with high mutual fund ownership have comovements in liquidity that are about twice as large as those for stocks with low mutual fund ownership. We also find that stocks owned by mutual funds with higher turnover and those owned by mutual funds that experience liquidity shocks themselves have higher commonality in liquidity. These results suggest an important role for the demand side of liquidity in explaining commonality.

Keywords: liquidity, commonality, mutual funds

JEL Classification: G10, G20, G23

Suggested Citation

Koch, Andrew and Ruenzi, Stefan and Starks, Laura T., Commonality in Liquidity: A Demand-Side Explanation (March 18, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1364124 or http://dx.doi.org/10.2139/ssrn.1364124

Andrew Koch (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Stefan Ruenzi

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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