What Constrains Liquidity Provision? Evidence from Hedge Fund Trades

46 Pages Posted: 9 Apr 2019

See all articles by Francesco A. Franzoni

Francesco A. Franzoni

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

Alberto Plazzi

Swiss Finance Institute; USI Lugano

Efe Cotelioglu

USI Lugano; Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: April 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: funding liquidity, Hedge Funds, Limits of arbitrage, Liquidity Provision, Trading Costs

JEL Classification: G20, G23

Suggested Citation

Franzoni, Francesco A. and Plazzi, Alberto and Cotelioglu, Efe, What Constrains Liquidity Provision? Evidence from Hedge Fund Trades (April 2019). CEPR Discussion Paper No. DP13645. Available at SSRN: https://ssrn.com/abstract=3368142

Francesco A. Franzoni

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/

Efe Cotelioglu (Contact Author)

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

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