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Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds
[Does motivation matter when assessing trade performance? An analysis of mutual funds]

Author

Listed:
  • Susan K Christoffersen
  • Donald B Keim
  • David K Musto
  • Aleksandra Rzeźnik

Abstract

Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.

Suggested Citation

  • Susan K Christoffersen & Donald B Keim & David K Musto & Aleksandra Rzeźnik, 2022. "Passive-Aggressive Trading: The Supply and Demand of Liquidity by Mutual Funds [Does motivation matter when assessing trade performance? An analysis of mutual funds]," Review of Finance, European Finance Association, vol. 26(5), pages 1145-1177.
    • Handle: RePEc:oup:revfin:v:26:y:2022:i:5:p:1145-1177.
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    File URL: http://hdl.handle.net/10.1093/rof/rfac008
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    References listed on IDEAS

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    Cited by:

    1. Huang, Alan Guoming & Wermers, Russ & Xue, Jinming, 2023. ""Buy the rumor, sell the news": Liquidity provision by bond funds following corporate news events," CFR Working Papers 23-07, University of Cologne, Centre for Financial Research (CFR).

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    More about this item

    Keywords

    Fund flows; Trading costs; Information; Liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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