Mutual Fund Flight-to-Liquidity
59 Pages Posted: 7 Feb 2017 Last revised: 26 Jan 2018
Date Written: October 5, 2017
This paper empirically investigates a channel through which market uncertainty affects the liquidity premium. Using data at the mutual fund level, I document that increases in market uncertainty are associated with lower performance and more withdrawals. Consequently, funds adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. Aggregated over many funds, this `flight-to-liquidity' places significant upward price pressure on the liquidity premium: a one standard deviation increase in my measure of active liquidity management yields a 1.22 standard deviation increase in the return spread between illiquid and liquid stocks.
Keywords: Market Uncertainty, Financial Crisis, Liquidity, Flight-To-Liquidity, Mutual Funds, Institutional Investors, Price Pressure, Idiosyncratic Volatility, Systematic Risk
JEL Classification: G01, G11, G12, G14, G20
Suggested Citation: Suggested Citation