Liquidity risk and the performance of UK mutual funds

Jason Foran; Niall O'Sullivan

doi:10.1016/j.irfa.2014.09.001

Liquidity risk and the performance of UK mutual funds

Jason Foran
, Niall O'Sullivan

Cork University Business School

University College Cork

Research output: Contribution to journal › Article › peer-review

Abstract

We examine the role of liquidity risk, both as a stock characteristic as well as systematic liquidity risk, in UK mutual fund performance for the first time. We find that on average UK mutual funds are tilted towards liquid stocks (except for small stock funds as might be expected) but that, counter-intuitively, liquidity rather than illiquidity, as a stock characteristic is positively priced in the cross-section of fund performance. We find that systematic liquidity risk is positively priced in the cross-section of fund performance although controlling for momentum effects weakens the robustness of this finding somewhat. Overall, our results reveal a strong role for stock liquidity level and systematic liquidity risk in fund performance evaluation models.

Original language	English
Pages (from-to)	178-189
Number of pages	12
Journal	International Review of Financial Analysis
Volume	35
DOIs	https://doi.org/10.1016/j.irfa.2014.09.001
Publication status	Published - 1 Oct 2014

Keywords

Liquidity characteristics
Liquidity risk
Mutual fund performance

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10.1016/j.irfa.2014.09.001

https://hdl.handle.net/10468/1721Licence: CC BY-NC-ND

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title = "Liquidity risk and the performance of UK mutual funds",

abstract = "We examine the role of liquidity risk, both as a stock characteristic as well as systematic liquidity risk, in UK mutual fund performance for the first time. We find that on average UK mutual funds are tilted towards liquid stocks (except for small stock funds as might be expected) but that, counter-intuitively, liquidity rather than illiquidity, as a stock characteristic is positively priced in the cross-section of fund performance. We find that systematic liquidity risk is positively priced in the cross-section of fund performance although controlling for momentum effects weakens the robustness of this finding somewhat. Overall, our results reveal a strong role for stock liquidity level and systematic liquidity risk in fund performance evaluation models.",

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AB - We examine the role of liquidity risk, both as a stock characteristic as well as systematic liquidity risk, in UK mutual fund performance for the first time. We find that on average UK mutual funds are tilted towards liquid stocks (except for small stock funds as might be expected) but that, counter-intuitively, liquidity rather than illiquidity, as a stock characteristic is positively priced in the cross-section of fund performance. We find that systematic liquidity risk is positively priced in the cross-section of fund performance although controlling for momentum effects weakens the robustness of this finding somewhat. Overall, our results reveal a strong role for stock liquidity level and systematic liquidity risk in fund performance evaluation models.

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KW - Mutual fund performance

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JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

ER -

Liquidity risk and the performance of UK mutual funds

Abstract

Keywords

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