Dynamic Liquidity and Mutual Fund Performance

Abstract

This article introduces a new measure of liquidity for equity mutual funds. This measure, the dynamic liquidity score (DLS), is a combination of a fund’s money flow and its volatility around money flow. The authors show that a fund’s dynamic liquidity score is an improved indicator of fund liquidity and can be used as a signal of performance. For example, in a volatile market, a high DLS is associated with a higher fund return, whereas in a stable market, DLS is negatively associated with the fund return. Overall, the impact of dynamic liquidity on fund performance is short term and time varying.