Flight-to-liquidity, market uncertainty, and the actions of mutual fund investors

Azi Ben-Rephael

Journal of Financial Intermediation, 2017, vol. 31, issue C, 30-44

Abstract: We explore the trading decisions of equity mutual funds during ten periods of extreme market uncertainty. We find that mutual funds reduced their aggregate holdings of illiquid stocks. Exploring the drivers behind this result reveals that this is mainly driven by larger withdrawals from funds that hold less liquid stocks. We further find that the sell-off of illiquid stocks occurred only after initial deterioration in market conditions, consistent with retail investors’ response to bad performance. At a broader level, this shows that mutual funds consumed liquidity during periods where liquidity was most valuable. Moreover, the fact that fund managers traded in response to these withdrawals suggests a potentially magnifying channel for the drop in illiquid stock prices, also known as flight-to-liquidity.

Keywords: Market uncertainty; Financial crises; Liquidity; Flight-to-liquidity; Flow-induced trading; Mutual funds; Institutional investors; Liquidity provision; Portfolio liquidation (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G14 G20 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:31:y:2017:i:c:p:30-44

DOI: 10.1016/j.jfi.2017.05.002

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