Mutual Funds and the Market for Liquidity

46 Pages Posted: 8 Apr 2005

See all articles by Ludovic Phalippou

Ludovic Phalippou

University of Oxford - Said Business School

Massimo Massa

INSEAD - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2004

Abstract

We study how actively managed equity mutual funds select the liquidity level of their equity portfolio and the effects of this selection on performance. We provide evidence of five key determinants of portfolio liquidity: portfolio size, portfolio concentration, the manager's trading frequency, investment style, and fee structure. We also show that liquidity is a persistent characteristic, but it is nevertheless dynamically managed so as to offset both exogenous liquidity shocks and changes in portfolio characteristics. Liquid funds are seen to strongly overperform (underperform) during illiquid (liquid) times but, on average, net performance is unaffected by liquidity.

Keywords: Mutual funds, liquidity

JEL Classification: G11, G12, G14

Suggested Citation

Phalippou, Ludovic and Massa, Massimo, Mutual Funds and the Market for Liquidity (December 2004). CEPR Discussion Paper No. 4818. Available at SSRN: https://ssrn.com/abstract=700669

Ludovic Phalippou

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

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