Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds

40 Pages Posted: 10 Mar 2018

See all articles by Susan Kerr Christoffersen

Susan Kerr Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School

Donald B. Keim

University of Pennsylvania - Wharton School

David K. Musto

University of Pennsylvania - Finance Department

Aleksandra Rzeznik

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

Date Written: March 9, 2018

Abstract

Fund managers can demand liquidity for their trading ideas or provide liquidity for others’ ideas. We identify the roles of these motives using a database of the individual transactions by Canadian equity funds. Both the cost and subsequent performance of their buys decline after strong inflows, indicating the depletion of ideas and substitution into liquidity provision as funds put new money to work. Sales show little of this substitution, consistent with funds’ narrower latitude to provide liquidity to buyers. In general, the option to provide liquidity makes fund returns positive in the transactions costs of buys, but not of sells.

Suggested Citation

Christoffersen, Susan E. and Keim, Donald B. and Musto, David K. and Rzeznik, Aleksandra, Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds (March 9, 2018). Rotman School of Management Working Paper No. 3137465. Available at SSRN: https://ssrn.com/abstract=3137465 or http://dx.doi.org/10.2139/ssrn.3137465

Susan E. Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416 946 5647 (Phone)
416 971 3048 (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/schristoffersen

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Donald B. Keim

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

David K. Musto (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Aleksandra Rzeznik

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

Welthandelsplatz 1
Vienna, 1020
Austria

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