Liquidity risk and the performance of UK mutual funds
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. Using four alternative measures of stock liquidity we extract principal components across stocks in order to construct systematic or market liquidity factors. 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 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. Overall, our results reveal a strong role for stock liquidity level and systematic liquidity risk in fund performance evaluation models.
Mutual fund performance , Liquidity risk , Liquidity characteristics
FORAN, J. & O'SULLIVAN, N. 2014. Liquidity risk and the performance of UK mutual funds. International Review of Financial Analysis, 35, 178-189. http://dx.doi.org/10.1016/j.irfa.2014.09.001
Copyright © 2014 Elsevier Inc. All rights reserved. NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, [Volume 35, October 2014, Pages 178–189] DOI http://dx.doi.org/10.1016/j.irfa.2014.09.001