Working Paper: CEPR ID: DP4818
Authors: Massimo Massa; Ludovic Phalippou
Abstract: We study how actively managed equity mutual funds select the liquidity level of their equity portfolio and the effects of this selection on performance. We provide evidence of five key determinants of portfolio liquidity: portfolio size, portfolio concentration, the manager?s trading frequency, investment style, and fee structure. We also show that liquidity is a persistent characteristic, but it is nevertheless dynamically managed so as to offset both exogenous liquidity shocks and changes in portfolio characteristics. Liquid funds are seen to strongly overperform (underperform) during illiquid (liquid) times but, on average, net performance is unaffected by liquidity.
Keywords: liquidity; mutual funds
JEL Codes: G11; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| portfolio size (G11) | portfolio liquidity (G19) |
| portfolio liquidity (G19) | mutual fund performance (G23) |
| exogenous liquidity shocks (F41) | portfolio liquidity (G19) |
| changes in portfolio characteristics (G11) | portfolio liquidity (G19) |
| liquid funds (G23) | illiquid funds performance during illiquid months (G23) |
| liquid funds (G23) | illiquid funds performance during liquid months (G23) |