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

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

doi:10.1093/rof/rfac008

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

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

^*Corresponding author for this work

Department of Finance

Research output: Contribution to journal › Journal article › Research › peer-review

Abstract

Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.

Original language	English
Journal	Review of Finance
Volume	26
Issue number	5
Pages (from-to)	1145-1177
Number of pages	33
ISSN	1572-3097
DOIs	https://doi.org/10.1093/rof/rfac008
Publication status	Published - Sept 2022

Bibliographical note

Published online: 09 February 2022.

Keywords

Fund flows
Trading costs
Information
Liquidity

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10.1093/rof/rfac008Licence: Unspecified

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Cite this

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title = "Passive-aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds",

abstract = "Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.",

keywords = "Fund flows, Trading costs, Information, Liquidity, Fund flows, Trading costs, Information, Liquidity",

author = "Christoffersen, {Susan E. K.} and Keim, {Donald B.} and Musto, {David K.} and Aleksandra Rzeznik",

note = "Published online: 09 February 2022.",

year = "2022",

month = sep,

doi = "10.1093/rof/rfac008",

language = "English",

volume = "26",

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T2 - The Supply and Demand of Liquidity by Mutual Funds

AU - Christoffersen, Susan E. K.

AU - Keim, Donald B.

AU - Musto, David K.

AU - Rzeznik, Aleksandra

N1 - Published online: 09 February 2022.

PY - 2022/9

Y1 - 2022/9

N2 - Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.

AB - Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.

KW - Fund flows

KW - Trading costs

KW - Information

KW - Liquidity

KW - Fund flows

KW - Trading costs

KW - Information

KW - Liquidity

U2 - 10.1093/rof/rfac008

DO - 10.1093/rof/rfac008

M3 - Journal article

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JO - Review of Finance

JF - Review of Finance

IS - 5

ER -