What Constrains Liquidity Provision? Evidence From Institutional Trades

46 Pages Posted: 26 Mar 2013 Last revised: 30 Jun 2020

See all articles by Efe Çötelioğlu

Efe Çötelioğlu

Swiss Finance Institute; USI Lugano

Francesco A. Franzoni

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

Alberto Plazzi

Swiss Finance Institute; Universita' della Svizzera italiana

Multiple version iconThere are 3 versions of this paper

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

Çötelioğlu, Efe and Franzoni, Francesco A. and Plazzi, Alberto, What Constrains Liquidity Provision? Evidence From Institutional Trades (June 1, 2020). Systemic Risk: Liquidity Risk, Governance and Financial Stability, 2013, Swiss Finance Institute Research Paper No. 13-10, Forthcoming in Review of Finance, Available at SSRN: https://ssrn.com/abstract=2239327 or http://dx.doi.org/10.2139/ssrn.2239327

Efe Çötelioğlu

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

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

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://usi.to/mpy

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