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Short-term reversals, returns to liquidity provision and the costs of immediacy

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  • Ignashkina, Anna
  • Rinne, Kalle
  • Suominen, Matti

Abstract

Some mutual funds act as contrarian traders, earning returns in the stock market by providing liquidity, while others demand liquidity and suffer costs of immediacy. The funds’ liquidity demand has increased over time. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity by 1.9% pa. High market beta funds, large cap funds, and funds exposed to momentum suffer over 2.5% pa. in costs of immediacy. Other results are that mutual funds’ average alpha becomes insignificant when the costs of immediacy are accounted for and in the cross-section, the funds’ costs of immediacy predict their alphas.

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  • Ignashkina, Anna & Rinne, Kalle & Suominen, Matti, 2022. "Short-term reversals, returns to liquidity provision and the costs of immediacy," Journal of Banking & Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000309
    DOI: 10.1016/j.jbankfin.2022.106430
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    Cited by:

    1. Harald Hau & Sandy Lai, 2017. "The Role of Equity Funds in the Financial Crisis Propagation," Review of Finance, European Finance Association, vol. 21(1), pages 77-108.
    2. Boyarchenko, Nina & Larsen, Lars & Whelan, Paul, 2020. "The Overnight Drift," CEPR Discussion Papers 14462, C.E.P.R. Discussion Papers.
    3. Soumaya Ben Khelifa & Dorra Mezzez Hmaied, 2016. "Do European hedge fund managers time market liquidity?," Journal of Asset Management, Palgrave Macmillan, vol. 17(6), pages 393-407, October.

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