Abstract

http://ssrn.com/abstract=1537925
 
 

References (47)



 
 

Citations (21)



 


 



Can Hedge Funds Time Market Liquidity?


Charles Cao


Pennsylvania State University

Yong Chen


Texas A&M University - Department of Finance

Bing Liang


University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)

Andrew W. Lo


Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)

November 20, 2012

Journal of Financial Economics (JFE), Forthcoming
AFA 2013 San Diego Meetings Paper

Abstract:     
We explore a new dimension of fund managers’ timing ability by examining whether they can time market liquidity through adjusting their portfolios’ market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0%–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision-making.

Number of Pages in PDF File: 55

Keywords: Hedge funds, liquidity timing, investment value, liquidity reaction, performance persistence

JEL Classification: G23, G11

Accepted Paper Series





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Date posted: January 22, 2010 ; Last revised: December 6, 2012

Suggested Citation

Cao, Charles and Chen, Yong and Liang, Bing and Lo, Andrew W., Can Hedge Funds Time Market Liquidity? (November 20, 2012). Journal of Financial Economics (JFE), Forthcoming; AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1537925 or http://dx.doi.org/10.2139/ssrn.1537925

Contact Information

Charles Cao
Pennsylvania State University ( email )
Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)
HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html
Yong Chen (Contact Author)
Texas A&M University (TAMU) - Department of Finance ( email )
360 Wehner Building
College Station, TX 77843-4218
United States
HOME PAGE: http://people.tamu.edu/~ychen

Bing Liang
University of Massachusetts at Amherst - Department of Finance & Operations Management ( email )
Amherst, MA 01003
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)
HOME PAGE: http://web.mit.edu/alo/www
Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)
Stata Center
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  47
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