Short-Term Reversals, Returns to Liquidity Provision and the Costs of Immediacy

69 Pages Posted: 18 Jan 2010 Last revised: 3 Feb 2016

Kalle Rinne

Luxembourg School of Finance

Matti Suominen

Aalto University School of Business

Date Written: January 28, 2016

Abstract

We present evidence that some mutual funds systematically act as contrarian traders, and earn returns in the stock market by providing liquidity to investors, while others systematically demand liquidity and suffer costs of immediacy. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity. The funds with outflows, flows that correlate with industry flows, high market beta funds, and funds highly exposed to the momentum strategy suffer the most in costs of immediacy. The mutual funds’ average underperformance can be explained with their costs of immediacy. Finally, the funds’ historical costs of immediacy predict their alphas.

Keywords: mutual funds, liquidity, immediacy, fund flow, investment strategy

JEL Classification: G23, G11, G12

Suggested Citation

Rinne, Kalle and Suominen, Matti, Short-Term Reversals, Returns to Liquidity Provision and the Costs of Immediacy (January 28, 2016). Available at SSRN: https://ssrn.com/abstract=1537923 or http://dx.doi.org/10.2139/ssrn.1537923

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)

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