The Volcker Rule and the Hedge Fund Liquidity Circle

73 Pages Posted: 25 Nov 2019 Last revised: 25 Sep 2022

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

The implementation of the Volcker Rule (section 619 of the 2010 Dodd-Frank Act)
profoundly impacts the funding liquidity of hedge funds, their liquidity risk exposure
and liquidity provision to the market. Analysing a sample of 5,697 hedge funds, we find that following the legislation, capital flows to hedge funds decline, and their flow-performance sensitivity increases. Hedge funds reduce their market liquidity exposure and realign their market-making activities towards the most liquid stocks. These results support the Brunnermeier-Pedersen model of illiquidity spirals.

Keywords: Volcker Rule, Hedge funds, Liquidity risk, Liquidity provision, Fund flows

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). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, 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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