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

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Woodrow T. Johnson

U.S. Securities and Exchange Commission

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Abstract

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

Suggested Citation

Johnson, Woodrow T., Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders. Journal of Finance, Vol. 59, No. 5, pp. 1979-2012, 2004, Available at SSRN: https://ssrn.com/abstract=481422

Woodrow T. Johnson (Contact Author)

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