Economics and Business Review | 2026
Authors: Kumar S.; Ali H.
DOI: 10.18559/ebr.2026.1.2746
Journal: Economics and Business Review
Year: 2026
Publisher: Sciendo
Document Type: Article
Open Access: All Open Access; Gold Open Access; Green Open Access
Cited by: 0
This study examines how aggregate market liquidity influences the cross-section of Indian equity mutual fund returns through two mechanisms: (1) funds’ long-run exposure to liquidity risk, and (2) managers’ time-varying liquidity timing. Using a comprehensive sample from 2007–2024, we estimate rolling liquidity betas, form portfolios sorted by liquidity exposure, and compute a high-minus-low liquidity-beta return spread. The liquidity premium is positive and economically meaningful in tranquil and recovery regimes, but weakens or vanishes during systemic stress, consistent with state-dependent liquidity pricing. Adding a traded equity-liquidity factor to standard benchmarks explains a meaningful portion of the spread, while an independently constructed timing factor captures an additional 55%–64%, highlighting the importance of conditional beta management. Timing effects are concentrated among high-liquidity-beta funds, smoothing returns in normal markets but offering limited protection in crises. Findings are robust to alternative benchmarks, flow-adjusted timing specifications, and post-COVID subperiod definitions. © 2026 Suresh Kumar et al., published by Poznan University of Economics and Business.
asset pricing; emerging markets; liquidity risk; liquidity timing; mutual funds