Mutual Funds and the Market for Liquidity
46 Pages Posted: 8 Apr 2005
Date Written: December 2004
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: Suggested Citation