Mutual fund illiquidity, selling pressure, and left-tail risk in stocks

We examine whether mutual fund illiquidity introduces fragility into stock prices. The results show that stocks held by more illiquid funds subsequently experience higher left-tail risk and more outflows-induced mutual fund selling. Specifically, this positive effect is almost entirely concentrated during periods of high economic policy uncertainty and bear market. Finally, we confirm that stocks’ liquidity commonality and asymmetric information do not explain our findings. Our research has important implications for fund managers in liquidity management and for regulatory authorities in preventing the risk of investor runs.