Mutual Funds’ Returns from Providing Liquidity and Costs of Immediacy

Kalle Rinne and Matti Suominen
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Matti Suominen: LSF

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: We present evidence that some mutual funds systematically act as contrarian traders, and earn returns in the stock market by providing liquidity to investors that demand immediacy, while others systematically realize costs of immediacy. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity. The funds with outflows, flows that correlate with industry flows, high market beta funds, and funds highly exposed to the momentum strategy suffer the most in costs of immediacy. The mutual funds’ average underperformance can be explained with their costs of immediacy. Finally, the funds’ historical costs of immediacy predict their alphas.

Keywords: mutual funds; liquidity; immediacy; fund flow; investment strategy (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:14-01

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