What Constrains Liquidity Provision? Evidence From Institutional Trades
Systemic Risk: Liquidity Risk, Governance and Financial Stability, 2013
Swiss Finance Institute Research Paper No. 13-10
Forthcoming in Review of Finance
46 Pages Posted: 26 Mar 2013 Last revised: 30 Jun 2020
There are 3 versions of this paper
What Constrains Liquidity Provision? Evidence From Institutional Trades
What Constrains Liquidity Provision? Evidence From Hedge Fund Trades
What Constrains Liquidity Provision? Evidence from Hedge Fund Trades
Date Written: June 1, 2020
Abstract
The paper studies liquidity provision by institutional investors using trade-level data. We find that hedge fund trades are a more important predictor of stock-level liquidity than mutual fund trades. However, hedge funds' liquidity provision is more exposed to financial conditions than that of mutual funds. Hedge funds that are more cnstrained in terms of leverage, age, asset illiquidity, and past performance exhibit a stronger shift towards liquidity consumption when funding condition tighten. Stocks with more exposure to constrained liquidity providing hedge funds suffered more during the financial crisis.
Keywords: hedge funds, limits of arbitrage, liquidity provision, trading costs, funding liquidity
JEL Classification: G20, G23
Suggested Citation: Suggested Citation
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