Laurie Simon Hodrick

Liquidity: Considerations of a Portfolio Manager

Coauthor(s): Pamela Moulton.


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This paper examines liquidity and how it affects the behavior of mutual fund portfolio managers, who account for a significant portion of trading in many assets. We define an asset to be perfectly liquid if a portfolio manager can trade the quantity she desires when she desires at a price not worse than the uninformed expected value. A portfolio manager is limited by both what she needs to attain and the ease with which she can attain it, making her sensitive to three dimensions of liquidity: price, timing, and quantity. Deviations from perfect liquidity in any of these dimensions impose shadow costs on the portfolio manager. By focusing on the trade-off between sacrificing on price and quantity instead of the canonical price-time trade-off, the model yields several novel empirical implications. Understanding a portfolio manager's liquidity considerations provides important insights into the liquidity of assets and asset classes.

Source: Financial Management
Exact Citation:
Hodrick, Laurie, and Pamela Moulton. "Liquidity: Considerations of a Portfolio Manager." Financial Management 38, no. 1 (Spring 2009): 59-74.
Volume: 38
Number: 1
Pages: 59-74
Date: Spring 2009