2022-2024 ISF (Israel Science Foundation) --- Liquidity Demand and Provision among Different Types of Institutional Investors

Liquidity is provided by market makers whose main activity is trading, such as specialists, dealers, and high-frequency traders. However, liquidity may also be provided by traders whose main activity is not short-term trading. The objective of this proposal is to explore the liquidity supply and demand of mutual funds and long-term savings institutions using unique data from Israel. The database includes daily flows to mutual funds and the transactions of mutual funds and long-term savings institutions. We expect to find that mutual fund flows drive mutual fund transactions, long-term savings institutions provide liquidity to mutual funds and are compensated for their liquidity provision, and mutual fund performance is deteriorated by liquidity demand. We investigate stocks, corporate bonds, and government bonds traded in Israel in the same exchange by the same mechanism. This will enable us to compare our findings across different asset classes. Our sample period begins in 2014 and includes the period of the COVID-19 crisis, enabling us to compare the phenomenon in normal and crisis periods.