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Fund Tradeoffs

Author

Listed:
  • Lubos Pastor
  • Robert F. Stambaugh
  • Lucian A. Taylor

Abstract

We derive equilibrium relations among active mutual funds' key characteristics: fund size, expense ratio, turnover, and portfolio liquidity. As our model predicts, funds with smaller size, higher expense ratios, and lower turnover hold less liquid portfolios. A portfolio's liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. We derive simple, theoretically motivated measures of portfolio liquidity and diversification. Both measures have trended up over time. We also find larger funds are cheaper, funds trading less are larger and cheaper, and excessively large funds underperform, as our model predicts.

Suggested Citation

  • Lubos Pastor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Fund Tradeoffs," NBER Working Papers 23670, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23670
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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