Dynamic Liquidity Preferences of Mutual Funds

47 Pages Posted: 19 Mar 2008 Last revised: 23 Dec 2020

See all articles by Jiekun Huang

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: December 22, 2020

Abstract

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

Huang, Jiekun, Dynamic Liquidity Preferences of Mutual Funds (December 22, 2020). AFA 2009 San Francisco Meetings Paper, EFA 2008 Athens Meetings Paper, Second Singapore International Conference on Finance 2008, Quarterly Journal of Finance, Vol. 10, No. 04, 2050018 (2020), Available at SSRN: https://ssrn.com/abstract=967553 or http://dx.doi.org/10.2139/ssrn.967553

Jiekun Huang (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

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