New Schulich Research Sheds Light on How Mutual Funds Manage Liquidity During Market Stress
Toronto, ON – September 11, 2025 – New research from York University’s Schulich School of Business uncovers how equity mutual funds actively manage their portfolios to preserve liquidity during times of market volatility – and shines a light on the implications this has for stock prices and overall market stability.
The research, titled “Active Liquidity Management, Strategic Complementarities, and Market Price of Liquidity”, is forthcoming in the journal Management Science and is sole authored by Aleksandra Rzeźnik, Assistant Professor of Finance at Schulich. In this paper, Professor Rzeźnik analyzes how investor redemptions during periods of market stress drive mutual funds to rebalance their holdings. She finds that funds engage in a “flight-to-liquidity” by selling off their most illiquid assets first – following a liquidation “pecking order.” This rebalancing, in turn, affects the pricing of liquidity across the market and results in greater returns to liquidity provision during market stress.
“When faced with uncertainty and investor outflows, fund managers tend to prioritize liquidity preservation,” says Rzeźnik. “This behaviour is not random – it follows a systematic pattern where the least liquid assets are sold off first, which has important implications for the market price of liquidity.”
The research highlights that funds most exposed to what she calls “strategic complementarities” – situations where investor behaviour reinforces collective reactions such as widespread withdrawals – are especially vulnerable during turbulent times. These funds adjust their portfolios more aggressively, intensifying the overall market response.
Rzeźnik’s findings provide new insights into the demand-side drivers of liquidity premium and the role of mutual funds in transmitting shocks during financial crises.
“Understanding how liquidity management works in practice is critical for policymakers, investors and market participants,” says Rzeźnik. “It helps explain why certain stocks and sectors are more affected during crises and these findings can inform strategies to lessen the impact of liquidity shocks.”
The study uses data from U.S. open-end equity mutual funds and examines responses to the 2008 financial crisis, as well as broader periods of heightened market volatility.
The full research paper, Active Liquidity Management, Strategic Complementarities, and Market Price of Liquidity, is available here.
