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Liquidity Risk and Mutual Fund Performance

Xi Dong

CUNY Baruch College

Shu Feng

Boston University

Ronnie Sadka

Boston College - Carroll School of Management

February 6, 2013

AEA 2012 Chicago Meetings Paper

This paper hypothesizes that market liquidity constrains mutual fund managers' ability to outperform, which introduces a higher liquidity risk exposure (beta) for skilled managers. Consistently, we document an annual liquidity beta performance spread of 4% in the cross-section of mutual funds over the period 1983-2014. Liquidity risk premia based on traditional passive equity portfolios can explain only an insubstantial part of this spread. Instead, the differential ability of high liquidity beta funds to outperform across high and low market liquidity states, whether due to differential rate of mispricing correction or intensity of informed trading, contributes significantly to explaining this spread. The findings highlight the complex effect of liquidity risk on active management.

Number of Pages in PDF File: 63

Keywords: Liquidity risk, Finanical Institutions, Price impact, Asset pricing

JEL Classification: G12, G14

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Date posted: March 15, 2011 ; Last revised: January 15, 2017

Suggested Citation

Dong, Xi and Feng, Shu and Sadka, Ronnie, Liquidity Risk and Mutual Fund Performance (February 6, 2013). AEA 2012 Chicago Meetings Paper . Available at SSRN: https://ssrn.com/abstract=1785561 or http://dx.doi.org/10.2139/ssrn.1785561

Contact Information

Xi Dong (Contact Author)
CUNY Baruch College ( email )
17 Lexington Avenue
New York, NY 10021
United States
HOME PAGE: http://aux.zicklin.baruch.cuny.edu/dong/
Shu Feng
Boston University ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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