Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund Investors
Indiana University - Kelley School of Business - Department of Finance
March 28, 2014
We explore institutional investor trading decisions during crisis periods and provide evidence that the flight-to-liquidity premium is at least partially driven by mutual fund flows. Mutual funds, on aggregate, reduce their holdings of illiquid stocks. This reduction is a result of larger withdrawals from funds that hold less liquid stocks, and not of fund manager strategic trading decisions. Fund managers are forced to trade, which in turn creates a direct selling pressure that contributes to the decline in illiquid stocks prices. These findings suggest a new and important link between the literature on the price impact of institutional flows and systematic liquidity pricing.
Number of Pages in PDF File: 74
Keywords: market uncertainty, financial crisis, liquidity, flight-to-liquidity, mutual funds, institutional investors, price pressure
JEL Classification: G01, G11, G12, G14, G20
Date posted: July 16, 2012 ; Last revised: May 11, 2014