Liquidity risk and liquidity timing in the cross-section of Indian equity mutual fund returns
DOI:
https://doi.org/10.18559/ebr.2026.1.2746Keywords:
liquidity risk, liquidity timing, asset pricing, mutual funds, emerging marketsAbstract
This study examines how aggregate market liquidity influences the cross-section of Indian equity mutual fund returns through two mechanisms: (1) funds’ long-run exposure to liquidity risk, and (2) managers’ time-varying liquidity timing. Using a comprehensive sample from 2007–2024, we estimate rolling liquidity betas, form portfolios sorted by liquidity exposure, and compute a high-minus-low liquidity‑beta return spread. The liquidity premium is positive and economically meaningful in tranquil and recovery regimes, but weakens or vanishes during systemic stress, consistent with state-dependent liquidity pricing. Adding a traded equity-liquidity factor to standard benchmarks explains a meaningful portion of the spread, while an independently constructed timing factor captures an additional 55%–64%, highlighting the importance of conditional beta management. Timing effects are concentrated among high-liquidity-beta funds, smoothing returns in normal markets but offering limited protection in crises. Findings are robust to alternative benchmarks, flow-adjusted timing specifications, and post-COVID subperiod definitions.
JEL Classification
Forecasting and Prediction Methods • Simulation Methods (C53)
Financial Markets and the Macroeconomy (E44)
Forecasting and Simulation: Models and Applications (E47)
Portfolio Choice • Investment Decisions (G11)
Asset Pricing • Trading Volume • Bond Interest Rates (G12)
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