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Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy

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  • Aragon, George O.
  • Strahan, Philip E.

Abstract

Hedge funds using Lehman as prime broker faced a decline in funding liquidity after the September 15, 2008 bankruptcy. We find that stocks held by these Lehman-connected funds experienced greater declines in market liquidity following the bankruptcy than other stocks; the effect was larger for ex ante illiquid stocks and persisted into the beginning of 2009. We find no similar effects surrounding the Bear Stearns failure, suggesting that disruptions surrounding bankruptcy explain the liquidity effects. We conclude that shocks to traders' funding liquidity reduce the market liquidity of the assets that they trade.

Suggested Citation

  • Aragon, George O. & Strahan, Philip E., 2012. "Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy," Journal of Financial Economics, Elsevier, vol. 103(3), pages 570-587.
  • Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:570-587
    DOI: 10.1016/j.jfineco.2011.10.004
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    References listed on IDEAS

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    Keywords

    Hedge fund; Market and funding liquidity;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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