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Publications
  • 2016
  • Working Paper

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

By: Sergey Chernenko and Adi Sunderam
  • Format:Print
  • | Language:English
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Abstract

We study liquidity transformation in mutual funds using a novel dataset 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.

Keywords

Financial Liquidity; Cash; Investment Funds

Citation

Chernenko, Sergey, and Adi Sunderam. "Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds." Harvard Business School Project on Behavioral Finance and Financial Stability Working Paper, No. 2016-01, July 2016. (NBER Working Paper Series, No. 22391, July 2016.)
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About The Author

Adi Sunderam

Finance
→More Publications

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More from the Authors
  • Shared Models in Networks, Organizations, and Groups By: Joshua Schwartzstein and Adi Sunderam
  • Segmented Arbitrage By: Emil Siriwardane, Adi Sunderam and Jonathan L. Wallen
  • Perceptions about Monetary Policy By: Michael D. Bauer, Carolin Pflueger and Adi Sunderam
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