Dynamic Liquidity Preferences of Mutual Funds
Quarterly Journal of Finance, Vol. 10, No. 04, 2050018 (2020)
47 Pages Posted: 19 Mar 2008 Last revised: 23 Dec 2020
Date Written: December 22, 2020
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 preferences; expected volatility; performance
JEL Classification: G11, G20, G30
Suggested Citation: Suggested Citation