Mutual Fund Liquidity Creation

38 Pages Posted: 30 Jan 2022

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Viet-Dung Doan

Hong Kong Baptist University

Date Written: January 27, 2022


We develop a novel measure of the dollar value of liquidity created by open-end mutual funds. Our measure compares the costs investors would have incurred had they traded on their own in response to liquidity shocks with the actual costs incurred by open-end mutual funds when trading to satisfy investor redemptions. Applying this measure to municipal bond mutual funds, we show that during the 2008-2017 period the average fund provides liquidity services worth 1.80 cents per dollar of gross redemptions or 50 basis points of fund assets per year. The aggregate value of liquidity services provided during this period was $14-22 billion. We decompose liquidity creation into three components: 1) flow netting, 2) liquidity management, and 3) trade execution, and explore the cross-sectional and time-series variation in liquidity creation.

Keywords: liquidity creation, municipal bonds, mutual funds

JEL Classification: G20, G23

Suggested Citation

Chernenko, Sergey and Doan, Viet-Dung, Mutual Fund Liquidity Creation (January 27, 2022). Available at SSRN: or

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)


Viet-Dung Doan

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

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