Dash for Cash: Monthly Market Impact of Institutional Liquidity Needs
AFA 2016 San Francisco
75 Pages Posted: 22 Nov 2014 Last revised: 12 Oct 2017
Date Written: October 11, 2017
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: Suggested Citation