Skip to main content
SpringerLink
Log in

Do liquidity and idiosyncratic risk matter? Evidence from the European mutual fund market

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

This paper examines the interaction of idiosyncratic risk, liquidity and return across time in determining fund performance, as well as across investment style portfolios of European mutual funds. This study utilizes a unique data set including returns for equity mutual funds registered in six European countries. Overall, using monthly data, we find that both liquidity and idiosyncratic risk are relevant in determining mutual fund returns. Our results are robust across different model specifications. We show that model specifications up to six factors are useful as these risk factors capture different aspects in the cross-section of mutual funds returns. The evidence regarding mutual funds subgroups is strongly in favor of the significance of liquidity, and idiosyncratic risk to a lesser extent, as risk factors. Even if liquidity and idiosyncratic risk are considered at the same time, one factor is not significantly decreasing the importance of the other factor.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. See European Fund and Asset Management Association (EFAMA) 2012 annual statistics. We exclude Luxemburg as it is considered an offshore centre, as a result of fiscal advantages.

  2. Source: Lipper, a Thomson Reuters company.

  3. Returns on low-price stocks are influenced by the minimum tick of $1/8 (see Harris 1994), which adds noise to the estimations. Prices are converted to euros before the introduction of the currency.

References

  • Acharya V, Pedersen LH (2005) Asset pricing with liquidity risk. J Financ Econ 77:375–410

    Article  Google Scholar 

  • Amihud Y (2002) Illiquidity and stock returns: cross-section and time-series effects. J Financ Mark 5:31–56

    Article  Google Scholar 

  • Angelidis T, Andrikopoulos A (2010) Idiosyncratic risk, returns and liquidity in the London Stock Exchange: a spillover approach. Int Rev Financ Anal 19:214–221

    Article  Google Scholar 

  • Avramov D, Chordia T (2006) Asset pricing models and financial market anomalies. Rev Financ Stud 19:1001–1040

    Article  Google Scholar 

  • Baker M, Stein J (2004) Market liquidity as a sentiment indicator. J Financ Mark 7:271–299

    Article  Google Scholar 

  • Bali T, Nusret C, Xuemin Y, Zhe Z (2005) Does idiosyncratic risk really matter? J Financ 60:905–929

    Article  Google Scholar 

  • Banz RW (1981) The relative efficiency of various portfolios: some further evidence: discussion. J Financ 32:663–682

    Google Scholar 

  • Biktimirov E, Li B (2014) Asymmetric stock price and liquidity responses to changes in the FTSE Small Cap index. Rev Quant Financ Acc 42:95–122

    Article  Google Scholar 

  • Brunnermeier MK, Pedersen LH (2009) Market liquidity and funding liquidity. Rev Financ Stud 22:2201–2238

    Article  Google Scholar 

  • Campbell JY, Martin L, Malkiel BG, Xu Y (2001) Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk. J Financ 56:1–43

    Article  Google Scholar 

  • Carhart M (1997) On persistence in mutual fund performance. J Financ 52:57–82

    Article  Google Scholar 

  • Chiu J, Chung H, Ho K (2014) Fear sentiment, liquidity, and trading behavior: evidence from the index ETF market. Rev Pac Basin Financ Mark Polic 17:1–25

    Google Scholar 

  • Chordia T, Subrahmanyam A, Anshuman VR (2001) Trading activity and expected stock returns. J Financ Econ 59:3–32

    Article  Google Scholar 

  • Dong X, Feng S, Sadka R (2012) Does liquidity beta predict mutual-fund alpha? Working Paper

  • Dybvig PH, Stephen AR (1985) The analytics of performance measurement using a security market line. J Financ 40:401–416

    Article  Google Scholar 

  • Elton E, Gruber M, Blake C (1995) Fundamental economic variables, APT, and bond fund performance. J Financ 50:1229–1256

    Article  Google Scholar 

  • Elton EJ, Gruber MJ, Blake CR (1996) The persistence of risk-adjusted mutual fund performance. J Bus 69:133–157

    Article  Google Scholar 

  • Fama EF, French K (1992) The cross-section of expected stock returns. J Financ 47:427–465

    Article  Google Scholar 

  • Fama EF, French K (1993) Common risk factors in the return on stocks and bonds. J Financ Econ 33:3–56

    Article  Google Scholar 

  • Fama EF, French K (1996) Multifactor explanations of asset pricing anomalies. J Financ 51:55–84

    Article  Google Scholar 

  • Fama E, MacBeth J (1973) Risk, return, and equilibrium: empirical tests. J Polit Econ 81:607–636

  • Fu F (2009) Idiosyncratic risk and the cross-section of expected stock returns. J Financ Econ 91:24–37

    Article  Google Scholar 

  • Goyal A, Santa-Clara P (2003) Idiosyncratic risk matters! J Financ 58:975–1008

    Article  Google Scholar 

  • Grinblatt M, Titman S (1989a) Mutual fund performance: an analysis of quarterly portfolio holding. J Bus 62:393–416

    Article  Google Scholar 

  • Grinblatt M, Titman S (1989b) Portfolio performance evaluation: old issues and new insights. Rev Financ Stud 2:393–421

    Article  Google Scholar 

  • Grinblatt M, Titman S (1994) A study of mutual fund returns and performance evaluation techniques. J Financ Quant Anal 29:419–444

    Article  Google Scholar 

  • Gruber MJ (1996) Another puzzle: the growth in actively managed mutual funds. J Financ 51:783–810

    Article  Google Scholar 

  • Gruenbichler A, Pleschiutschnig U (1999) Performance persistence: evidence for the European mutual funds market. Working Paper, University of St. Gallen

  • Hachmeister A, Schiereck D (2010) Dancing in the dark: post-trade anonymity, liquidity and informed trading. Rev Quant Financ Acc 34:145–177

    Article  Google Scholar 

  • Harris LE (1994) Minimum price variation, discrete bid–ask spreads, and quotation sizes. Rev Financ Stud 7:149–178

    Article  Google Scholar 

  • Hasbrouck J (2005) Trading costs and returns for US equities: the evidence from daily data. J Financ 64:1445–1477

  • Ho T, Stoll H (1980) On dealer markets under competition. J Financ 35:259–267

    Article  Google Scholar 

  • Ho C, Lee C, Lin C, Wang E (2005) Liquidity, volatility and stock price adjustment: evidence from seasoned equity offerings in an emerging market. Rev Pac Basin Financ Mark Polic 8:31–51

    Article  Google Scholar 

  • Jensen MC (1968) The performance of mutual funds in the period 1945–1964. J Financ 23:389–416

    Article  Google Scholar 

  • Lee K (2011) The world price of liquidity risk. J Financ Econ 99:136–161

  • Lo A, Wang J (2000) Trading volume: definitions, data analysis, and implications of portfolio theory. Rev Financ Stud 13:257–300

    Article  Google Scholar 

  • Malkiel BG (1995) Returns from investing in equity mutual funds 1971–1991. J Financ 50:549–572

  • Malkiel BG, Xu Y (2006) Idiosyncratic risk and security returns. Working Paper, University of Texas at Dallas

  • Merton R (1987) A simple model of capital market equilibrium with incomplete information. J Financ 42:483–510

    Article  Google Scholar 

  • Newey W, West K (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55:703–708

  • Nelson DB (1991) Conditional heteroskedasticity in asset returns: new approach. Econometrica 59:347–370

    Article  Google Scholar 

  • O’Hara M (2003) Presidential address: liquidity and price discovery. J Financ 58:1335–1354

    Article  Google Scholar 

  • Otten R, Bams D (2002) European mutual fund performance. Eur Financ Manag 8:75–101

    Article  Google Scholar 

  • Reinganum M (1981) A misspecification of capital asset pricing: empirical anomalies based on earnings’ yields and market values. J Financ Econ 9:19–46

  • Pastor L, Stambaugh R (2003) Liquidity risk and expected stock returns. J Polit Econ 111:642–685

    Article  Google Scholar 

  • Sharpe W (1966) Mutual fund performance. J Bus 39:119–138

  • Spiegel MI, Avanidhar S (1995) On intraday risk premia. J Financ 50:319–339

    Article  Google Scholar 

  • Spiegel MI, Wang X (2005) Cross-sectional variation in stock returns: liquidity and idiosyncratic risk. Yale ICF Working Paper No. 05-13

  • Stoll H (2000) Presidential address: friction. J Financ 55:1479–1514

  • Wagner NF, Winter E (2013) A new family of equity style indices and mutual fund performance: do liquidity and idiosyncratic risk matter? J Empir Financ 21:69–85

    Article  Google Scholar 

  • Watanabe A, Watanabe M (2008) Time-varying liquidity risk and the cross section of stock returns. Rev Financ Stud 21:2449–2486

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Financial Economics III, Facultad de Ciencias Económicas y Empresariales, Complutense University of Madrid, Spain, Campus de Somosaguas, Pabellón de sexto, 28223, Pozuelo De Alarcón, Madrid, Spain

    Javier Vidal-García

  2. Department of Business Administration, Facultad de Ciencias Económicas y Empresariales, Complutense University of Madrid, Spain, Campus de Somosaguas, 28223, Pozuelo De Alarcón, Madrid, Spain

    Marta Vidal

  3. IPAG Business School, 184 Boulevard Saint-Germain, 75006, Paris, France

    Duc Khuong Nguyen

Authors
  1. Javier Vidal-García
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Marta Vidal
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Duc Khuong Nguyen
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Javier Vidal-García.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Vidal-García, J., Vidal, M. & Nguyen, D.K. Do liquidity and idiosyncratic risk matter? Evidence from the European mutual fund market. Rev Quant Finan Acc 47, 213–247 (2016). https://doi.org/10.1007/s11156-014-0488-7

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-014-0488-7

Keywords

JEL Classification

Search

Navigation