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Cash Management and Extreme Liquidity Demand of Mutual Funds

July 21, 2020

Giulio Girardi, Christof Stahel, and Youchang Wu


We study episodes of extreme liquidity demand at the mutual fund style level and the contribution of individual funds to the aggregate liquidity demand during these episodes. Our measure of liquidity demand incorporates the impacts of both investor redemptions and fund manager cash management decisions. We find that funds entering crisis months with low levels of cash contribute more to the overall liquidity imbalance as they (i) face higher investor redemptions during and after the crisis, and (ii) choose to build up more cash reserves during the crisis. Our results highlight the importance the micro-level mutual fund prudential liquidity management in mitigating the aggregate-level liquidity imbalance.​


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