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Mutual Funds and the Market for Liquidity

Author

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  • Massa, Massimo
  • Phalippou, Ludovic

Abstract

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.

Suggested Citation

  • Massa, Massimo & Phalippou, Ludovic, 2004. "Mutual Funds and the Market for Liquidity," CEPR Discussion Papers 4818, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4818
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    Citations

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    Cited by:

    1. Xi Dong & Shu Feng & Ronnie Sadka, 2019. "Liquidity Risk and Mutual Fund Performance," Management Science, INFORMS, vol. 65(3), pages 1020-1041, March.
    2. Robert Kosowski, 2011. "Do Mutual Funds Perform When It Matters Most to Investors? US Mutual Fund Performance and Risk in Recessions and Expansions," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 607-664.
    3. Malay K. Dey & B. Radhakrishna (Radha), 2007. "Who Trades Around Earnings Announcements? Evidence from TORQ Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 269-291, January.
    4. Malay K. Dey & B. Radhakrishna (Radha), 2007. "Who Trades Around Earnings Announcements? Evidence from TORQ Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1-2), pages 269-291.
    5. Cici, Gjergji & Dahm, Laura K. & Kempf, Alexander, 2014. "Trading efficiency of fund families: Impact on fund performance and investment behavior," CFR Working Papers 14-14, University of Cologne, Centre for Financial Research (CFR).

    More about this item

    Keywords

    Mutual funds; Liquidity;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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