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Mutual Fund Trades: Asymmetric Liquidity Preferences And Fund Performance

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  • Alex Clarke
  • Grant Cullen
  • Dominic Gasbarro
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    Abstract

    We investigate the role of the liquidity of stocks traded by mutual funds on the performance of funds experiencing substantial and sustained redemptions (outflows) or inflows. Accordingly, we identify 770 redeeming fund-periods and 1,757 inflow fund-periods and find a statistically significant relation between the liquidity of the stocks they trade and the quantity of the stock traded. Notably, when funds experience redemptions, those with low portfolio liquidity have an elevated preference for selling more-liquid stocks. In the following period, such funds statistically and economically underperform funds that sell less-liquid stocks. This is consistent with redemptions detrimentally affecting shareholders that remain in a fund. 2007 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 30 (2007)
    Issue (Month): 4 ()
    Pages: 515-532

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:4:p:515-532

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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Wagner, Niklas & Winter, Elisabeth, 2013. "A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 69-85.
    2. Cullen, Grant & Gasbarro, Dominic & Monroe, Gary S., 2010. "Mutual fund trades and the value of contradictory private information," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 378-387, February.

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