Mutual Funds and the Market for Liquidity
47 Pages Posted: 9 Apr 2005
Date Written: May 2005
Using a large sample of US active equity mutual funds from 1983 to 2001, we show that portfolio liquidity is actively managed and chosen as a function of the multiple liquidity needs a fund has. Using portfolio liquidity as a parsimonious proxy for the severity of liquidity needs, we find that fund performance is independent of liquidity needs. We also find that unpredictable changes in market liquidity and short-term deviations from optimal liquidity level affect performance. These results are consistent with the view that liquidity impacts portfolio choice and that the provision of capital to mutual funds is competitive and optimal.
Keywords: Mutual funds, liquidity
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation