Abstract
This paper provides empirical evidence on the liquidity provision of hedge funds to noninformational traders. I propose a method to estimate the daily market-making of funds with equity-based strategies through monthly hedge fund return data. I find that around 25% of my sample of 4,299 hedge funds provided liquidity to noninformational traders over the period from 1994 to 2013. I show that the importance of market-making hedge funds has increased substantially over the last decade. Also, their liquidity provision correlates negatively with market volatility. When market volatility peaked during the financial crisis of 2007-2009, the majority of market-making funds turned into liquidity demanders. Further, I analyse the trading behaviour of hedge funds on days on which price changes are attributable to the release of macroeconomic announcements. A considerable fraction of funds appears to predict the content of scheduled announcements made by the Federal Open Market Committee (FOMC).
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
