The Liquidity Preferences of Mutual Funds in Different Volatility Conditions: Australian Evidence

24 Pages Posted: 30 Jan 2013 Last revised: 9 Dec 2013

See all articles by Taiji Wang

Taiji Wang

University of Adelaide

Tariq H. Haque

University of Adelaide; Financial Research Network (FIRN)

Date Written: December 8, 2013

Abstract

Following Huang (2013) we hypothesize that Australian mutual funds may increase exposure to liquid assets such as cash and the most liquid assets within their investible universe, in response to a forecast of high market volatility. The switch to liquid assets ensures that the fund can deal with any redemptions in high volatility conditions, at lower cost, and more easily take advantage of any positive alpha opportunities in highly volatile conditions. We find that funds that do increase exposure to cash and the most liquid assets in their investible universe in anticipation of high volatility, outperform those funds that do not follow this strategy. Funds that increase exposure to cash and the most liquid stocks in their investible universe also outperform funds that do not follow this strategy, even in periods of low volatility.

Keywords: Mutual Funds, Volatility, Large-Cap Funds, Small-Cap Funds

JEL Classification: G20

Suggested Citation

Wang, Taiji and Haque, Tariq H., The Liquidity Preferences of Mutual Funds in Different Volatility Conditions: Australian Evidence (December 8, 2013). 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2208882 or http://dx.doi.org/10.2139/ssrn.2208882

Taiji Wang (Contact Author)

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

Tariq H. Haque

University of Adelaide ( email )

10 Pulteney St, Adelaide Busines School
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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