Dynamic Liquidity Preferences of Mutual Funds

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the relation between expected market volatility and open-end mutual funds' liquidity preferences. Using a large panel of actively managed U.S. equity mutual funds, I show that mutual fund managers hold more cash and tilt their holdings more heavily towards liquid stocks during periods when expected market volatility is high. Cross-sectional tests suggest that the dynamic preferences for liquidity are driven by concerns over investor withdrawals during volatile times. Furthermore, I find evidence that this type of dynamic behavior leads to higher fund returns.

Original languageEnglish (US)
Article number2050018
JournalQuarterly Journal of Finance
Volume10
Issue number4
Early online dateOct 28 2020
DOIs
StatePublished - Dec 2020
Externally publishedYes

Keywords

  • Mutual funds
  • expected volatility
  • liquidity preferences
  • performance

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Strategy and Management

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