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

63 Pages Posted: 5 Nov 2020

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Adi Sunderam

Harvard University - Business School (HBS)

Multiple version iconThere are 3 versions of this paper

Date Written: September, 2016

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.

Keywords: liquidity transformation, asset management, mutual funds, cash holdings, fire sales

JEL Classification: G23

Suggested Citation

Chernenko, Sergey and Sunderam, Adi, Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds (September, 2016). ESRB: Working Paper Series No. 2016/23, Available at SSRN: https://ssrn.com/abstract=3723369 or http://dx.doi.org/10.2139/ssrn.3723369

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://www.sergeychernenko.com

Adi Sunderam

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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