Mutual Fund Flight-to-Liquidity

59 Pages Posted: 7 Feb 2017 Last revised: 26 Jan 2018

See all articles by Aleksandra Rzeznik

Aleksandra Rzeznik

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

Date Written: October 5, 2017

Abstract

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

Rzeznik, Aleksandra, Mutual Fund Flight-to-Liquidity (October 5, 2017). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=2912368 or http://dx.doi.org/10.2139/ssrn.2912368

Aleksandra Rzeznik (Contact Author)

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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