Working Paper: NBER ID: w23670
Authors: Lubos Pastor; Robert F. Stambaugh; Lucian A. Taylor
Abstract: We study tradeoffs among active mutual funds' characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. We also confirm other model-predicted tradeoffs: Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.
Keywords: Active Mutual Funds; Portfolio Liquidity; Diversification; Diseconomies of Scale
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund size (G23) | portfolio liquidity (G19) |
| expense ratio (M41) | portfolio liquidity (G19) |
| turnover (J63) | portfolio liquidity (G19) |