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Liquidity risk and hedge fund ownership

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  • Charles Cao
  • Lubomir Petrasek
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    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.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-49.

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    Date of creation: 2011
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    Handle: RePEc:fip:fedgfe:2011-49

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    Related research

    Keywords: Hedge funds ; Liquidity (Economics) ; Rate of return;

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    References

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    3. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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