Abstract - Commonality in Liquidity: A Demand-Side Explanation
We hypothesize that a source of commonality in a stock’s liquidity arises from correlated trading among the stock’s investors. Focusing on correlated trading of mutual funds, we find that stocks with high mutual fund ownership have comovements in liquidity that are about twice as large as those for stocks with low mutual fund ownership. We also find that stocks owned by mutual funds with higher turnover and those owned by mutual funds that experience liquidity shocks themselves have higher commonality in liquidity. These results suggest an important role for the demand side of liquidity in explaining commonality.