Mutual Fund Flight-to-Liquidity

98 Pages Posted: 7 Feb 2017 Last revised: 13 Jun 2022

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University - Schulich School of Business

Date Written: October 5, 2017


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: or

Aleksandra Rzeźnik (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

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