Dynamic Liquidity and Mutual Fund Performance
Journal of Investing (JOI), Forthcoming
Posted: 21 May 2019
Date Written: March 16, 2016
This paper introduces a new measure of liquidity for equity mutual funds. Our measure, called dynamic liquidity, is a combination of a fund’s money flow and its volatility around money flow. We show that a fund’s dynamic liquidity score (DLS) is an improved indicator of fund liquidity and can be used as a signal of performance. For example, in a volatile market, a high DLS is associated with higher fund return, whereas in a stable market, DLS is negatively associated with fund return. Overall the impact of dynamic liquidity on fund performance is short-term and time-varying.
Keywords: Dynamic liquidity score (DLS), net money flows, market volatility, fund performance
JEL Classification: G11, G14
Suggested Citation: Suggested Citation