IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Do Hedge Funds Reduce Idiosyncratic Risk?

  • Namho Kang
  • Peter Kondor
  • Ronnie Sadka

This paper studies the effect of hedge-fund trading on idiosyncratic risk. We hypothesize that while hedge-fund activity would often reduce idiosyncratic risk, high initial levels of idiosyncratic risk might be further amplified due to fund loss limits. Panel-regression analyses provide supporting evidence for this hypothesis. The results are robust to sample selection and are further corroborated by a natural experiment using the Lehman bankruptcy as an exogenous adverse shock to hedge-fund trading. Hedge-fund capital also explains the increased idiosyncratic volatility of high-idiosyncratic-volatility stocks as well as the decreased idiosyncratic volatility of low-idiosyncratic-volatility stocks over the past few decade.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.personal.ceu.hu/staff/repec/pdf/2012_15.pdf
File Function: Full text
Download Restriction: no

File URL: http://www.personal.ceu.hu/staff/repec/pdf/2012_15_appendix.pdf
File Function: Appendix
Download Restriction: no

Paper provided by Department of Economics, Central European University in its series CEU Working Papers with number 2012_15.

as
in new window

Length:
Date of creation: 04 Oct 2012
Date of revision: 04 Oct 2012
Handle: RePEc:ceu:econwp:2012_15
Contact details of provider: Postal: Nador u. 9 - 1051 Budapest 5
Phone: (36-1) 327-3000
Fax: (36-1) 327-3001
Web page: http://economics.ceu.hu/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Owen A. Lamont & Jeremy C. Stein, 2004. "Aggregate Short Interest and Market Valuations," American Economic Review, American Economic Association, vol. 94(2), pages 29-32, May.
  2. Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi, 2012. "Hedge Fund Stock Trading in the Financial Crisis of 2007--2009," Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 1-54.
  3. Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
  4. Jon Danielsson & Hyun Song Shin & Jean-Pierre Zigrand, 2004. "The impact of risk regulation on price dynamics," LSE Research Online Documents on Economics 16628, London School of Economics and Political Science, LSE Library.
  5. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
  6. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  7. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
  8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  9. Richard W. Sias, 2004. "Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
  10. Nicole M. Boyson & Christof W. Stahel & René M. Stulz, 2010. "Hedge Fund Contagion and Liquidity Shocks," Journal of Finance, American Finance Association, vol. 65(5), pages 1789-1816, October.
  11. Sadka, Ronnie, 2010. "Liquidity risk and the cross-section of hedge-fund returns," Journal of Financial Economics, Elsevier, vol. 98(1), pages 54-71, October.
  12. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
  13. Yexiao Xu & Burton G. Malkiel, 2003. "Investigating the Behavior of Idiosyncratic Volatility," The Journal of Business, University of Chicago Press, vol. 76(4), pages 613-644, October.
  14. Michael W. Brandt & Alon Brav & John R. Graham & Alok Kumar, 2010. "The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes?," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 863-899, February.
  15. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross-Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, 02.
  16. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  17. Péter Kondor, 2006. "Risk in Dynamic Arbitrage: Price Effects of Convergence Trading," MNB Working Papers 2006/6, Magyar Nemzeti Bank (the central bank of Hungary).
  18. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
  19. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc.
  20. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
  21. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ceu:econwp:2012_15. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anita Apor)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.