Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders
Journal of Finance, Vol. 59, No. 5, pp. 1979-2012, 2004
31 Pages Posted: 22 Mar 2005 Last revised: 29 Aug 2010
This study analyzes the distribution of investment horizons in a large, proprietary panel of all shareholders in one no-load mutual fund family. A proportional hazards model shows that there are observable shareholder characteristics that enable the fund to predict reliably on the day each account is opened whether the account will be short-term or long-term. Simulations show that the liquidity costs imposed on the fund by the expected short-term shareholders are significantly greater than those imposed by the expected long-term shareholders. Combining these results, the analysis argues that mutual funds do not provide equitable liquidity-risk insurance.
Keywords: mutual funds, shareholder behavior, investment horizon, duration, liquidity risk
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