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

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  • Sergey Chernenko
  • Adi Sunderam

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

  • Sergey Chernenko & Adi Sunderam, 2016. "Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds," NBER Working Papers 22391, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22391
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Liquidity Transformation and Open-end Funds
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-02-20 18:14:26

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    Cited by:

    1. repec:eee:moneco:v:89:y:2017:i:c:p:88-91 is not listed on IDEAS
    2. Ulf Lewrick & Jochen Schanz, 2017. "Is the price right? Swing pricing and investor redemptions," BIS Working Papers 664, Bank for International Settlements.
    3. Morris, Stephen & Shim, Ilhyock & Shin, Hyun Song, 2017. "Redemption risk and cash hoarding by asset managers," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 71-87.
    4. repec:eee:jfinec:v:126:y:2017:i:3:p:592-613 is not listed on IDEAS
    5. Nicola Branzoli & Giovanni Guazzarotti, 2017. "Liquidity transformation and financial stability: evidence from the cash management of open-end Italian mutual funds," Temi di discussione (Economic working papers) 1113, Bank of Italy, Economic Research and International Relations Area.
    6. Pan, Kevin & Zeng, Yao, 2017. "ETF arbitrage under liquidity mismatch," ESRB Working Paper Series 59, European Systemic Risk Board.
    7. Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, 2017. "Investor Concentration, Flows, and Cash Holdings : Evidence from Hedge Funds," Finance and Economics Discussion Series 2017-121, Board of Governors of the Federal Reserve System (U.S.).
    8. Sergey Chernenko & Josh Lerner & Yao Zeng, 2017. "Mutual Funds as Venture Capitalists? Evidence from Unicorns," NBER Working Papers 23981, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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