Commonality in Liquidity: A Demand-Side Explanation
Review of Financial Studies, Forthcoming
61 Pages Posted: 9 Mar 2016 Last revised: 15 Jul 2017
Date Written: October 8, 2015
We hypothesize that a source of commonality in a stock’s liquidity arises from correlated liquidity demand of the stock’s investors. Focusing on correlated trading of mutual funds, we find that stocks with high mutual fund ownership have comovements in liquidity about twice as large as those for stocks with low mutual fund ownership. Further analysis shows that the channels for these comovements derive from both common ownership across funds and funds’ correlated liquidity shocks. We obtain inferences supporting causality from an exogenous flow shock for mutual funds in the aftermath of the 2003 mutual fund scandal.
Keywords: Liquidity, Commonality, Mutual Funds
JEL Classification: G10, G14
Suggested Citation: Suggested Citation