Fund Flows, Liquidity, and Asset Prices
87 Pages Posted: 26 Mar 2019 Last revised: 6 Sep 2023
Date Written: August 28, 2023
I propose an intermediary asset pricing model, in which expected asset returns depend on fund flow betas: co-movements of returns and liquidity costs with the aggregate fund flow shocks. Using both standard asset pricing tests and identification strategies employing firm-month fixed effects and granular instrumental variables, I show that flow betas possess significant explanatory power for the cross-section of corporate bond returns. Consistent with my model, I demonstrate that bond funds underweight high-flow-risk bonds, hedging against high liquidation costs during outflows. Flow betas also explain cross-sectional stock returns, with equity funds underweighting high-flow-risk stocks, corroborating the mechanism in the model.
Keywords: Fund flow risk; Liquidity risk; Aggregate fund flows; Intermediary asset pricing; Cross-section; Hedging demand; Liquidity management
JEL Classification: G12, G20, G23
Suggested Citation: Suggested Citation