Leveraged Speculators and Asset Prices

52 Pages Posted: 18 Nov 2014 Last revised: 6 Dec 2019

See all articles by Wenxi Jiang

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Date Written: April 16, 2018

Abstract

I test the hypothesis that the use of leverage by market speculators can amplify economic shocks in stock markets. Using a direct leverage measure derived from U.S. public filings, I find that upon extremely negative earnings surprises, stocks held by highly leveraged hedge funds exhibit abnormal price declines and subsequent reversal. Consistent with the fire-sale hypothesis, high-leverage funds tend to reduce the position following negative news about a stock, compared to less leveraged funds. I further provide evidence of contagion: such fire sales can extend to other stocks in the portfolio, thereby increasing the crash-proneness of these stocks.

Keywords: Crashes, hedge fund leverage, skewness, fire sales

JEL Classification: G12; G23

Suggested Citation

Jiang, Wenxi, Leveraged Speculators and Asset Prices (April 16, 2018). Available at SSRN: https://ssrn.com/abstract=2525986 or http://dx.doi.org/10.2139/ssrn.2525986

Wenxi Jiang (Contact Author)

CUHK Business School, The Chinese University of Hong Kong ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

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