Mutual Fund Flight-to-Liquidity

Aleksandra Rzeznik

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

This paper examines the liquidity choices of mutual funds during times of market uncertainty. I find that when markets are uncertain, mutual funds actively increase the liquidity of their portfolio { often referred to as a `flight-to-liquidity.' In aggregate, mutual fund behaviour has implications for the market; the market driven flight-toliquidity places upward pressure on the liquidity premium. I examine the underlying mechanisms driving fund behaviour. I show that market volatility is associated with lower fund performance and withdrawals, which causes funds to adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. This causal chain is consistent with Vayanos (2004), who argues that fund managers are investors with time-varying liquidity preferences due to threat of withdrawal. Aggregated over funds, the effect is substantial: a one standard deviation increase in my measure of flight-to-liquidity yields a 0.63 standard deviation increase in the excess return required for holding illiquid securities.
Original languageEnglish
Publication date2016
Number of pages48
Publication statusPublished - 2016
EventThe 28th Annual Conference of the Northern Finance Association. NFA 2016 - Fairmont Tremblant, Mont-Tremblant, Québec, Canada
Duration: 16 Sep 201618 Sep 2016
Conference number: 28
http://www.northernfinance.org/

Conference

ConferenceThe 28th Annual Conference of the Northern Finance Association. NFA 2016
Number28
LocationFairmont Tremblant
CountryCanada
CityMont-Tremblant, Québec
Period16/09/201618/09/2016
Internet address

Bibliographical note

CBS Library does not have access to the material

Keywords

  • Market uncertainty
  • Financial crisis
  • Liquidity
  • Flight-to-inquidity
  • Mutual funds
  • Institutional investors
  • Price pressure
  • Idiosyncratic volability
  • Systematic risk

Cite this