Commonality in Liquidity: A Demand-Side Explanation

Review of Financial Studies, Forthcoming

61 Pages Posted: 9 Mar 2016 Last revised: 15 Jul 2017

See all articles by Andrew Koch

Andrew Koch

University of Pittsburgh - Finance Group

Stefan Ruenzi

University of Mannheim - Department of International Finance

Laura T. Starks

University of Texas at Austin - Department of Finance

Date Written: October 8, 2015

Abstract

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

Koch, Andrew and Ruenzi, Stefan and Starks, Laura T., Commonality in Liquidity: A Demand-Side Explanation (October 8, 2015). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2744763

Andrew Koch (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Stefan Ruenzi

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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