AEA 2012 Chicago Meetings Paper
63 Pages Posted: 15 Mar 2011 Last revised: 15 Jan 2017
Date Written: February 6, 2013
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.
Keywords: Liquidity risk, Finanical Institutions, Price impact, Asset pricing
JEL Classification: G12, G14
Suggested Citation: 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