Working Paper
Liquidity risk and hedge fund ownership
Abstract: Using a unique, hand-collected data set of hedge fund ownership, we examine the effects of hedge fund ownership on liquidity risk in the cross-section of stocks. After controlling for institutional preferences for stock characteristics, we find that stocks held by hedge funds as marginal investors are more sensitive to changes in aggregate liquidity than comparable stocks held by other types of institutions or by individuals. Stocks held by hedge funds also experience significantly negative abnormal returns during liquidity crises. These findings support the theory of Brunnermeier and Pedersen (2009) that ownership by levered traders leads to a greater liquidity risk.
Keywords: Hedge funds; Liquidity (Economics); Rate of return;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2011
Number: 2011-49