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

Kim, Minsoo, Fund Flows, Liquidity, and Asset Prices (August 28, 2023). Available at SSRN: or

Minsoo Kim (Contact Author)

University of Melbourne ( email )


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