Do Mutual Fund Managers Time Market Liquidity?

Abstract

Extant research has focused on mutual fund managers’ ability to time market returns or volatility. In this paper, we offer a new perspective on the traditional timing issue by examining fund managers’ ability to time market wide liquidity. Using the CRSP mutual fund database, we find strong evidence that over the 1974 to 2009 period, mutual fund managers demonstrate the ability to time market liquidity at both the portfolio level and the individual fund level. Liquidity timing predicts future fund performance and the difference in the risk-adjusted returns between top and bottom liquidity timing funds is approximately 2% per year. Funds exhibiting liquidity timing ability tend to have longer histories, higher expense ratios, and higher turnover rates.

Keywords: Liquidity timing, mutual fund performance, market liquidity, bootstrap

JEL Classification: G10, G11, G19, G29