What Constrains Liquidity Provision? Evidence From Hedge Fund Trades

43 Pages Posted: 26 Mar 2013 Last revised: 31 Mar 2019

See all articles by Efe Cotelioglu

Efe Cotelioglu

USI Lugano; Swiss Finance Institute

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Alberto Plazzi

Swiss Finance Institute; USI Lugano

Multiple version iconThere are 3 versions of this paper

Date Written: March 26, 2019

Abstract

The paper investigates the determinants of limits of arbitrage for liquidity providers. Using data on institutional transactions, we find that hedge funds' liquidity provision is more exposed to financial conditions than that of other institutions, notably mutual funds. We identify leverage, age, asset illiquidity, and reputational capital as a relevant set of characteristics that explain the exposure of hedge funds' liquidity supply to funding conditions. Stocks with more exposure to constrained liquidity providing hedge funds suffered more during the financial crisis. Finally, we find that the trades of financially constrained hedge funds underperform for at least one quarter following negative funding shocks.

Keywords: hedge funds, limits of arbitrage, liquidity provision, trading costs, funding liquidity

JEL Classification: G20, G23

Suggested Citation

Cotelioglu, Efe and Franzoni, Francesco A. and Plazzi, Alberto, What Constrains Liquidity Provision? Evidence From Hedge Fund Trades (March 26, 2019). Swiss Finance Institute Research Paper No. 13-10; Systemic Risk: Liquidity Risk, Governance and Financial Stability, 2013; Swiss Finance Institute Research Paper No. 13-10. Available at SSRN: https://ssrn.com/abstract=2239327 or http://dx.doi.org/10.2139/ssrn.2239327

Efe Cotelioglu

USI Lugano ( email )

Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Francesco A. Franzoni (Contact Author)

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Alberto Plazzi

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

USI Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://www.people.usi.ch/plazzia/

Register to save articles to
your library

Register

Paper statistics

Downloads
505
Abstract Views
3,365
rank
44,990
PlumX Metrics