Abstract
Hedge funds are known to have liquidity-timing capability, but this might be conditional on aggregate market conditions. To test this, we analyze changes in the relation between hedge funds' stock market exposure and aggregate stock market liquidity. Employing an optimal changepoint approach, we find that equity-oriented hedge funds display a significant shift in liquidity-timing behavior after the major market microstructure changes in the year 2000. The shift is from a negative relation between market beta and liquidity towards a positive relation. We rule out a mechanistic explanation of the results by computing the returns to several familiar risk arbitrage strategies, finding in them no evidence of a similar shift in liquidity timing.
| Original language | English |
|---|---|
| Pages (from-to) | 286-303 |
| Number of pages | 18 |
| Journal | Journal of Empirical Finance |
| Volume | 44 |
| Early online date | 17 Apr 2017 |
| DOIs | |
| Publication status | Published - Dec 2017 |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 17 Partnerships for the Goals
Keywords
- Changepoint regression
- Dynamic strategies
- Hedge funds
- Liquidity timing
- Market timing
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