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Editor's Choice Commonality in Liquidity: A Demand-Side Explanation

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  • Andrew Koch
  • Stefan Ruenzi
  • Laura Starks

Abstract

We hypothesize that a source of commonality in a stock’s liquidity arises from the correlated liquidity demand of the stock’s investors. Focusing on correlated trading of mutual funds, we find that stocks with high mutual fund ownership have comovements in liquidity about twice as large as those for stocks with low mutual fund ownership. Further analysis shows that the channels for these comovements derive from both common ownership across funds and funds’ correlated liquidity shocks. We obtain inferences supporting causality from an exogenous flow shock for mutual funds in the aftermath of the 2003 mutual fund scandal. Received December 7, 2012; accepted October 31, 2015 by Editor David Hirshleifer.

Suggested Citation

  • Andrew Koch & Stefan Ruenzi & Laura Starks, 2016. "Editor's Choice Commonality in Liquidity: A Demand-Side Explanation," The Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 1943-1974.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:8:p:1943-1974.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw026
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