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Monitoring the Liquidity Profile of Mutual Funds, Accessible Data
Figure 1. The Relation between Expected Returns and Liquidity
In Figure 1, we illustrate the relationship between fund expected returns (y-axis) and changes in the liquidity factor (x-axis), hypothetically. X-axis ranges from -0.3 to 0.3. The red dashed line is an example of the relation between fund expected returns and market liquidity after a shift in the sensitivity to market liquidity occurs. Moving from the blue solid circle to the red hollow triangle represents a change in the liquidity profile with constant underlying market liquidity.
The figure illustrates the relation between fund expected returns (y-axis) and changes in the liquidity factor (x-axis). If the sensitivity of the fund to aggregate market liquidity remains the same after a macroeconomic announcement, changes in aggregate market liquidity only imply movements along the blue solid line, from the solid marker to the hollow ones. The red dashed line is an example of the relation between fund expected returns and market liquidity after a shift in the sensitivity to market liquidity occurs. Moving from the blue solid circle to the red hollow triangle represents a change in the liquidity profile with constant underlying market liquidity.
Figure 2. Liquidity Beta for High-Yield Funds
In Figure 2, we plot changes in liquidity beta for high-yield bond funds and bank loan funds. The figure includes two panels. The top panel shows the 20-week moving average of changes in the cross-sectional average of weekly rolling liquidity betas throughout the sample period for the high-yield bond funds. The bottom panel shows the liquidity betas for the bank loan funds. . In both panels, x-axis show the years from 2005 to 2020. The beginning of the global financial crisis (December 1, 2007), bankruptcy of Lehman Brothers’ on Neuberger Berman, an affiliated asset manager (September 15, 2008), Third Avenue Focused Credit Fund’s suspension of redemptions (December 9, 2015) and the onset of COVID-19 shutdowns in the U.S. (March 15, 2020) are labeled with vertical lines. Data source is authors' calculations based on Morningstar Direct.