Abstract
We present broad-based evidence that the monthly payment cycle induces systematic patterns in liquid markets around the globe. First, we document temporary increases in the costs of debt and equity capital that coincide with key dates associated with month-end cash needs. Second, we present direct and indirect evidence on the role of institutions in the genesis of these patterns and derive estimates of the associated costs borne by market participants. Third, and finally, we investigate the limits to arbitrage that prevent markets from functioning efficiently. Our results indicate that many investors and their agents, including mutual funds, suffer from liquidity-related trading.
| Original language | English |
|---|---|
| Pages (from-to) | 75-111 |
| Number of pages | 37 |
| Journal | Review of Financial Studies |
| Volume | 33 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - Jan 2020 |
| MoE publication type | A1 Journal article-refereed |
Funding
We thank Doron Avramov, Utpal Btattacharya, John Campbell, Huaizhi Chen, Robert Dittmar, Bernard Dumas, Darrell Duffie, Thierry Foucault, Robin Greenwood (the editor), Denis Gromb, Bruce Grundy, David Hsieh, Antti Ilmanen, Russell Jame, Matti Keloharju, Dong Lou, Rajnish Mehra, Tyler Muir, Marina Niessner, Christopher Parsons, Lubos Pastor, Andrew Patton, Joshua Pollet, Ioanid Rosu, Nikolai Roussanov, Ravi Sastry, Andrei Simonov, Timo Somervuo, David Sraer, Jeremy Stein, Stijn van Nieuwerburgh, Michael Weber, and Hongjun Yan; two anonymous referees; and seminar participants at Aalto University, American Finance Association 2016 Annual Meeting, Auckland University of Technology, BI Norwegian Business School, Chinese University of Hong Kong, Conference on Frontiers of Factor Investing, HEC Paris, Hong Kong University of Science and Technology, INSEAD, the 5th Helsinki Finance Summit, Luxembourg School of Finance, the 8th Paul WoolleyCentre Conference at the London School of Economics, Manchester Business School, McGill University, National University of Singapore, Singapore Management University, University of Mannheim, University of Sydney, and the WU Gutmann Center Symposium 2015 in Vienna. Part of this paper was written when Kalle Rinne was affiliated with the Luxembourg School of Finance and the Luxembourg Institute of Science and Technology. We are grateful to Markus Hjulgren, Joona Karlsson, Antti Lehtinen, Mikael Paaso, and Mounir Shal for excellent research assistance. Matti Suominen recognizes financial support from the Cooperative Banks' Research Foundation, the Finnish Foundation for Securities Market research, Mandatum Life, and the Yrjo Jahnsson foundation. The views expressed in this paper are those of the authors and do not reflect the positions of Goldman, Sachs & Co or Mandatum Life.
Keywords
- TURN-OF-MONTH
- STOCK RETURNS
- CROSS-SECTION
- EXPLANATION
- DYNAMICS