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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. JEL Classification: G23

Suggested Citation

  • Sergey Chernenko & Adi Sunderam, 2016. "Liquidity transformation in asset management: Evidence from the cash holdings of mutual funds," ESRB Working Paper Series 23, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201623
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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. Bua, Giovanna & Dunne, Peter G. & Sorbo, Jacopo, 2019. "Money Market Funds and Unconventional Monetary Policy," Research Technical Papers 7/RT/19, Central Bank of Ireland.
    3. repec:eee:jfinec:v:126:y:2017:i:3:p:592-613 is not listed on IDEAS
    4. 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.
    5. Pan, Kevin & Zeng, Yao, 2017. "ETF arbitrage under liquidity mismatch," ESRB Working Paper Series 59, European Systemic Risk Board.
    6. Ulf Lewrick & Jochen Schanz, 2017. "Is the price right? Swing pricing and investor redemptions," BIS Working Papers 664, Bank for International Settlements.
    7. Mathias S. Kruttli & Phillip J. Monin & Sumudu W. Watugala, 2017. "Investor Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds," Working Papers 17-07, Office of Financial Research, US Department of the Treasury.
    8. Agostino Capponi & Paul Glasserman & Marko Weber, 2018. "Swing Pricing for Mutual Funds: Breaking the Feedback Loop Between Fire Sales and Fund Runs," Working Papers 18-04, Office of Financial Research, US Department of the Treasury.
    9. Frank Graef & Pascal Vogt & Volker Vonhoff & Florian Weigert, 2018. "Cash Holdings and the Performance of European Mutual Funds," Working Papers on Finance 1807, University of St. Gallen, School of Finance.
    10. 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 (US).
    11. Virginie Coudert & Dilyara Salakhova, 2019. "Price effect of mutual fund flows on the corporate bond market. The French case," Working papers 706, Banque de France.
    12. 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.
    13. Dötz, Niko & Weth, Mark, 2019. "Redemptions and asset liquidations in corporate bond funds," Discussion Papers 11/2019, Deutsche Bundesbank.

    More about this item

    Keywords

    liquidity transformation; asset management; mutual funds; cash holdings; fire sales;

    JEL classification:

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

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