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Article
Liquidity: Considerations of a Portfolio Manager
Articles and Chapters
  • Laurie Simon Hodrick, Columbia University
  • Pamela Moulton, Cornell University School of Hotel Administration
Publication Date
8-29-2007
Abstract
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.
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Required Publisher Statement
© Wiley-Blackwell. Final version published as: Simon Hodrick, L., & Moulton, P. C. (2009). Liquidity: Considerations of a portfolio manager. Financial Management, 38(1), 59-74. Reprinted with permission. All rights reserved.

Citation Information

Simon Hodrick, L., & Moulton, P. C. (2007). Liquidity: Considerations of a portfolio manager [Electronic version]. Retrieved [insert date], from Cornell University, School of Hospitality Administration site: http://scholarship.sha.cornell.edu/articles/5/