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 date2017
Number of pages48
Publication statusPublished - 2017
EventThe 77th Annual Meeting of American Finance Association. AFA 2017 - Sheraton Grand Chicago, Chicago, United States
Duration: 6 Jan 20178 Jan 2017
Conference number: 77
http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html

Conference

ConferenceThe 77th Annual Meeting of American Finance Association. AFA 2017
Number77
LocationSheraton Grand Chicago
CountryUnited States
CityChicago
Period06/01/201708/01/2017
Internet address

Keywords

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

Cite this

Rzeznik, A. (2017). Mutual Fund Flight-to-Liquidity. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.
Rzeznik, Aleksandra. / Mutual Fund Flight-to-Liquidity. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.48 p.
@conference{6aff0dbe28f3421687475a2f46287ea0,
title = "Mutual Fund Flight-to-Liquidity",
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.",
keywords = "Market uncertainty, Financial crisis, Liquidity, Flight-to-liquidity, Mutual funds, Institutional investors, Price pressure, Idiosyncratic volatility, Systematic risk, Market uncertainty, Financial crisis, Liquidity, Flight-to-liquidity, Mutual funds, Institutional investors, Price pressure, Idiosyncratic volatility, Systematic risk",
author = "Aleksandra Rzeznik",
year = "2017",
language = "English",
note = "null ; Conference date: 06-01-2017 Through 08-01-2017",
url = "http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html",

}

Rzeznik, A 2017, 'Mutual Fund Flight-to-Liquidity' Paper presented at, Chicago, United States, 06/01/2017 - 08/01/2017, .

Mutual Fund Flight-to-Liquidity. / Rzeznik, Aleksandra.

2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Mutual Fund Flight-to-Liquidity

AU - Rzeznik, Aleksandra

PY - 2017

Y1 - 2017

N2 - 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.

AB - 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.

KW - Market uncertainty

KW - Financial crisis

KW - Liquidity

KW - Flight-to-liquidity

KW - Mutual funds

KW - Institutional investors

KW - Price pressure

KW - Idiosyncratic volatility

KW - Systematic risk

KW - Market uncertainty

KW - Financial crisis

KW - Liquidity

KW - Flight-to-liquidity

KW - Mutual funds

KW - Institutional investors

KW - Price pressure

KW - Idiosyncratic volatility

KW - Systematic risk

M3 - Paper

ER -

Rzeznik A. Mutual Fund Flight-to-Liquidity. 2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.