Abstract

http://ssrn.com/abstract=1782800
 
 

References (36)



 
 

Citations (2)



 


 



Do Hedge Funds Reduce Idiosyncratic Risk?


Namho Kang


University of Connecticut

Peter Kondor


London School of Economics & Political Science (LSE); Central European University (CEU)

Ronnie Sadka


Boston College - Carroll School of Management

December 20, 2012

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:     
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.

Number of Pages in PDF File: 82

Keywords: idiosyncratic risk, hedge funds


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Date posted: March 11, 2011 ; Last revised: May 14, 2013

Suggested Citation

Kang, Namho and Kondor, Peter and Sadka, Ronnie, Do Hedge Funds Reduce Idiosyncratic Risk? (December 20, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1782800 or http://dx.doi.org/10.2139/ssrn.1782800

Contact Information

Namho Kang
University of Connecticut ( email )
Storrs, CT 06269-1063
United States
Peter Kondor (Contact Author)
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://fmg.lse.ac.uk/~kondor
Central European University (CEU) ( email )
Nador utca 9
Budapest, H-1051
Hungary
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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