The Volcker Rule and the Hedge Fund Liquidity Circle

54 Pages Posted: 25 Nov 2019

See all articles by Michael Bowe

Michael Bowe

University of Manchester

Olga Kolokolova

University of Manchester - Alliance Manchester Business School

Lijie Yu

University of Manchester - Alliance Manchester Business School

Date Written: November 13, 2019

Abstract

This paper finds that the implementation of the Volcker Rule (section 619 of the 2010 Dodd-Frank Act) profoundly impacts overall equity market liquidity, the funding liquidity of hedge funds, and their liquidity provision to the market. Analysis of a sample of 8,686 hedge funds reveals that subsequent to the Volcker Rule, funding flows to hedge funds decline, and their flow-performance sensitivity increases. Hedge funds also reduce their exposure to market liquidity and realign their market-making activities to the most liquid segment of stocks. The impact appears more pronounced for those funds with business connections to systemically important US banks, weak past performance, and adopting non-directional investment strategies.

Keywords: Volcker Rule, Hedge funds, Liquidity risk, Market liquidity

JEL Classification: G1, G18, G2, G23, G28

Suggested Citation

Bowe, Michael and Kolokolova, Olga and Yu, Lijie, The Volcker Rule and the Hedge Fund Liquidity Circle (November 13, 2019). Available at SSRN: https://ssrn.com/abstract=3486305 or http://dx.doi.org/10.2139/ssrn.3486305

Michael Bowe

University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 306 3407 (Phone)
+44 161 275 4023 (Fax)

Olga Kolokolova (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+441613062081 (Phone)

Lijie Yu

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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