Do Liquidity and Idiosyncratic Risk Matter?: Evidence from the European Mutual Fund Market

37 Pages Posted: 1 Feb 2012 Last revised: 22 Oct 2016

See all articles by Javier Vidal-García

Javier Vidal-García

Harvard University; Complutense University Madrid

Marta Vidal

Universidad Europea de Madrid; Universidad Complutense de Madrid (UCM)

Duc Khuong Nguyen

IPAG Business School

Date Written: June 1, 2014

Abstract

This paper examines the interaction of idiosyncratic risk, liquidity and return across time in determining fund performance, as well as across investment style portfolios of European mutual funds. This study utilizes a unique data set including returns for equity mutual funds registered in six European countries. Overall, using monthly data, we find that both liquidity and idiosyncratic risk are relevant in determining mutual fund returns. Our results are robust across different model specifications. We show that model specifications up to six factors are useful, these risk factors capture different aspects in the cross-section of mutual funds returns. The evidence regarding mutual funds subgroups is strongly in favor of the significance of liquidity, and idiosyncratic risk to a lesser extent, as risk factors. Even if liquidity and idiosyncratic risk are considered at the same time, one factor is not significantly decreasing the importance of the other factor.

Keywords: Mutual Fund Performance, Idiosyncratic Risk, Liquidity, Style Analysis

JEL Classification: G12, G15, G23

Suggested Citation

Vidal-García, Javier and Vidal, Marta and Nguyen, Duc Khuong, Do Liquidity and Idiosyncratic Risk Matter?: Evidence from the European Mutual Fund Market (June 1, 2014). Review of Quantitative Finance and Accounting, August 2016, Volume 47, Issue 2, pp 213-247.; Midwest Finance Association 2013 Annual Meeting Paper.. Available at SSRN: https://ssrn.com/abstract=1997446 or http://dx.doi.org/10.2139/ssrn.1997446

Javier Vidal-García (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Complutense University Madrid ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

Marta Vidal

Universidad Europea de Madrid ( email )

Villaviciosa de Odón
Madrid, 28670
Spain

Universidad Complutense de Madrid (UCM) ( email )

Somosaguas Campus
Madrid, 28223
Spain

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

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