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Liquidity Transformation in Asset Management: Evidence form the Cash Holdings of Mutual Funds

Author

Listed:
  • Chernenko, Sergey

    (Ohio State University)

  • Sunderam, Adi

    (Harvard University)

Abstract

We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds' cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.

Suggested Citation

  • Chernenko, Sergey & Sunderam, Adi, 2016. "Liquidity Transformation in Asset Management: Evidence form the Cash Holdings of Mutual Funds," Working Paper Series 2016-05, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2016-05
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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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