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
DOIs
StatePublished - Dec 2020

Keywords

  • Mutual funds
  • expected volatility
  • liquidity preferences
  • performance

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Strategy and Management

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