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Dash for Cash: Monthly Market Impact of Institutional Liquidity Needs

75 Pages Posted: 22 Nov 2014 Last revised: 12 Oct 2017

Erkko Etula

Independent

Kalle Rinne

Luxembourg School of Finance

Matti Suominen

Aalto University School of Business

Lauri Vaittinen

Independent

Date Written: October 11, 2017

Abstract

We present broad-based evidence that the monthly payment cycle induces systematic patterns
in liquid markets around the globe. First, we document temporary increases in the costs of debt and equity capital that coincide with key dates associated with month-end cash needs. Second, we present direct and indirect evidence on the role of institutions in the genesis of these patterns and derive estimates of the associated costs born by market participants. Finally, we investigate the limits to arbitrage that prevent markets from functioning efficiently. Our results indicate that many investors and their agents, including mutual funds, suffer from liquidity-related trading.

Keywords: asset pricing, limits of arbitrage, mutual funds, short-term reversals, turn-of-the-month effect

JEL Classification: G10, G12, G13

Suggested Citation

Etula, Erkko and Rinne, Kalle and Suominen, Matti and Vaittinen, Lauri, Dash for Cash: Monthly Market Impact of Institutional Liquidity Needs (October 11, 2017). AFA 2016 San Francisco; Finance Down Under 2016 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2528692 or http://dx.doi.org/10.2139/ssrn.2528692

Erkko Etula

Independent ( email )

No Address Available

Kalle Rinne

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

Lauri Vaittinen

Independent ( email )

No Address Available

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