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

Listed author(s):
  • Chernenko, Sergey

    (Ohio State University)

  • Sunderam, Adi

    (Harvard University)

Registered author(s):

    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.

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    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2016-05.

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    Date of creation: Jul 2016
    Handle: RePEc:ecl:ohidic:2016-05
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    Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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