NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Sergey Chernenko, Adi Sunderam

NBER Working Paper No. 22391
Issued in July 2016
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w22391

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