Do Hedge Funds Supply or Demand Liquidity?

Review of Finance, Forthcoming

59 Pages Posted: 24 Jun 2010 Last revised: 26 Jun 2013

See all articles by Petri Jylha

Petri Jylha

Aalto University

Kalle Rinne

Luxembourg School of Finance

Matti Suominen

Aalto University School of Business

Date Written: June 21, 2013

Abstract

Regressing hedge funds’ returns on returns to a long-short contrarian trading strategy, a measure of the returns from providing liquidity, we find that hedge funds typically supply liquidity in the stock market. In the cross-section, strict redemption restrictions and large fund size increase funds’ propensity to supply liquidity. In time-series, poor market liquidity and good funding conditions increase funds’ propensity to supply liquidity. Although the hedge funds typically supply liquidity, during crises they demand liquidity. We also find that increases in the amount of speculative capital improve market liquidity and reduce the amount of short-term return reversals and volatility.

Keywords: Hedge Funds, Speculative Capital, Liquidity, Immediacy, Volatility

JEL Classification: G12, G23

Suggested Citation

Jylha, Petri and Rinne, Kalle and Suominen, Matti, Do Hedge Funds Supply or Demand Liquidity? (June 21, 2013). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1629773 or http://dx.doi.org/10.2139/ssrn.1629773

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076
Finland

Kalle Rinne

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

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