Mutual Funds and the Market for Liquidity

Massimo Massa and Ludovic Phalippou

No 4818, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Mutual funds; Liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-fin and nep-fmk
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Citations: View citations in EconPapers (5)

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