Do liquidity and idiosyncratic risk matter? Evidence from the European mutual fund market

Javier Vidal-García (), Marta Vidal and Duc Khuong Nguyen
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Javier Vidal-García: Complutense University of Madrid, Spain
Marta Vidal: Complutense University of Madrid, Spain

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 2, No 1, 213-247

Abstract: Abstract This paper examines the interaction of idiosyncratic risk, liquidity and return across time in determining fund performance, as well as across investment style portfolios of European mutual funds. This study utilizes a unique data set including returns for equity mutual funds registered in six European countries. Overall, using monthly data, we find that both liquidity and idiosyncratic risk are relevant in determining mutual fund returns. Our results are robust across different model specifications. We show that model specifications up to six factors are useful as these risk factors capture different aspects in the cross-section of mutual funds returns. The evidence regarding mutual funds subgroups is strongly in favor of the significance of liquidity, and idiosyncratic risk to a lesser extent, as risk factors. Even if liquidity and idiosyncratic risk are considered at the same time, one factor is not significantly decreasing the importance of the other factor.

Keywords: Mutual fund performance; Idiosyncratic risk; Liquidity; Style analysis (search for similar items in EconPapers)
JEL-codes: G12 G15 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11156-014-0488-7

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