Working Paper: NBER ID: w22391
Authors: Sergey Chernenko; Adi Sunderam
Abstract: We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.
Keywords: No keywords provided
JEL Codes: G20; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity Transformation Activities (G19) | Cash Holdings (G19) |
| Cash Holdings (G19) | Price Impact Externalities (D62) |
| Holdings Overlap (G34) | Cash Holdings (G19) |
| Inflow (F21) | Cash Holdings (G19) |
| Outflow (F21) | Cash Holdings (G19) |
| Asset Illiquidity (G19) | Cash Management Practices (F32) |
| Flow Volatility (C69) | Cash-to-Assets Ratio (G32) |
| Low Market Liquidity (G19) | Cash Accommodation (F32) |