Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds

Susan E. K. Christoffersen, Donald B. Keim, David K. Musto, Aleksandra Rzeznik

Research output: Working paperResearch


Fund managers can demand liquidity for their trading ideas or provide liquidity for others’ ideas. We identify the roles of these motives using a database of the individual transactions by Canadian equity funds. Both the cost and subsequent performance of their buys decline after strong inflows, indicating the depletion of ideas and substitution into liquidity provision as funds put new money to work. Sales show little of this substitution, consistent with funds’ narrower latitude to provide liquidity to buyers. In general, the option to provide liquidity makes fund returns positive in the transactions costs of buys, but not of sells.
Original languageEnglish
Place of PublicationToronto
PublisherRotman School of Management, University of Toronto
Number of pages38
Publication statusPublished - 2018
SeriesRotman School of Management Working Paper

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