Liquidity Dry-ups in equity markets

Donghyun Kim, Chengcheng Li and Xiaoqiong Wang

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This paper examines how mutual fund investors’ demand for liquidity provision endogenously affects stock liquidity in the equity market. We find that actively managed funds in the US tend to hold less liquidity than their respective benchmarks, which leads them to rely on only a small fraction of liquid stocks when it comes to liquidity demand. Using mutual fund sell transactions, we further show that mutual funds tend to sell more liquid stocks in their holdings when experiencing outflows. Concentrated sales of liquid stocks, however, significantly reduce the liquidity of these stocks, resulting in liquidity deterioration or dry-up among highly liquid stocks in periods of high market-wide liquidity demand. Overall, the results indicate that mutual funds fail to predict the liquidity of the asset at purchase.

Keywords: Liquidity; Forced sale; Liquidity demand (search for similar items in EconPapers)
JEL-codes: G30 G31 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521923000522
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000522

DOI: 10.1016/j.irfa.2023.102536

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().