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Mutual fund trades: Asymmetric liquidity preferences and fund performance

Clarke, A., Cullen, G. and Gasbarro, D. (2007) Mutual fund trades: Asymmetric liquidity preferences and fund performance. Journal of Financial Research, 30 (4). pp. 515-532.

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We investigate the role of the liquidity of stocks traded by mutual funds on the performance of funds experiencing substantial and sustained redemptions (outflows) or inflows. Accordingly, we identify 770 redeeming fund-periods and 1,757 inflow fund-periods and find a statistically significant relation between the liquidity of the stocks they trade and the quantity of the stock traded. Notably, when funds experience redemptions, those with low portfolio liquidity have an elevated preference for selling more-liquid stocks. In the following period, such funds statistically and economically underperform funds that sell less-liquid stocks. This is consistent with redemptions detrimentally affecting shareholders that remain in a fund.

Item Type: Journal Article
Murdoch Affiliation(s): Murdoch Business School
Publisher: Blackwell Publishing
Copyright: © 2007 The Southern Finance Association and the Southwestern Finance Association.
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