Dynamic Liquidity Preferences of Mutual Funds
47 Pages Posted: 19 Mar 2008 Last revised: 5 Jun 2015
Date Written: June 15, 2015
This paper examines the relation between expected market volatility and open-end mutual funds' liquidity preferences. Using a large panel of actively managed U.S. equity mutual funds, I show that mutual fund managers hold more cash and tilt their holdings more heavily towards liquid stocks during periods when expected market volatility is high. Cross-sectional tests suggest that the dynamic preferences for liquidity are driven by concerns over investor withdrawals during volatile times. Furthermore, I find evidence that this type of dynamic behavior leads to higher fund returns.
Keywords: Mutual funds, liquidity, expected volatility, performance, market timing
JEL Classification: G11, G20, G30
Suggested Citation: Suggested Citation