Working Paper: CEPR ID: DP12513
Authors: Lubo Pstor; Robert F. Stambaugh; Lucian Taylor
Abstract: We derive equilibrium relations among active mutual funds' key characteristics: fund size, expense ratio, turnover, and portfolio liquidity. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. As our model predicts, funds with smaller size, higher expense ratios, and lower turnover hold less-liquid portfolios. Additional model predictions are also supported empirically: Larger funds are cheaper. Larger and cheaper funds trade less and are less active, based on our novel measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more.
Keywords: Portfolio Liquidity; Diversification; Mutual Funds
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funds with smaller size (G23) | hold less-liquid portfolios (G11) |
| Funds with higher expense ratios (G23) | hold less-liquid portfolios (G11) |
| Funds with lower turnover (G23) | hold less-liquid portfolios (G11) |
| Larger funds (G23) | are cheaper (P22) |
| Funds that trade less (G19) | are larger and cheaper (F12) |
| Better-diversified funds (G23) | hold less-liquid stocks (G19) |
| Funds with more diversified portfolios (G23) | are larger and cheaper (F12) |
| Funds with more diversified portfolios (G23) | hold less-liquid stocks (G19) |