Mutual Fund Flight-to-Liquidity

55 Pages Posted: 7 Feb 2017 Last revised: 9 Dec 2020

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University, Schulich School of Business

Date Written: October 5, 2017

Abstract

This paper empirically investigates a demand-side channel through which market uncertainty affects the liquidity premium. Using data at the mutual fund level, I document that fund managers actively shift the composition of their portfolio toward more liquid assets during high volatility periods. I argue that the increased demand for liquidity in times of market stress stems from a threat of strategic complementarities among investors. Aggregated over many funds, this `flight-to-liquidity' places a significant upward price pressure on the liquidity premium: a one standard deviation increase in my measure of active liquidity management yields 4.004pp increase in annualized reversal strategy return.

Keywords: Market uncertainty, financial crisis, liquidity, flight-to-liquidity, mutual funds, institutional investors, price pressure, systematic risk, strategic complementarities

JEL Classification: G01, G11, G23

Suggested Citation

Rzeźnik, 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 Rzeźnik (Contact Author)

York University, Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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