Efe Çötelioğlu, Francesco Franzoni, Alberto Plazzi
{"title":"What Constrains Liquidity Provision? Evidence From Institutional Trades","authors":"Efe Çötelioğlu, Francesco Franzoni, Alberto Plazzi","doi":"10.2139/ssrn.2239327","DOIUrl":null,"url":null,"abstract":"The paper investigates the determinants of limits of arbitrage for liquidity providers. Using data on institutional transactions, we compare hedge fund trades to those of other institutions. We find that hedge funds’ liquidity provision is more exposed to financial conditions than that of other institutions. We identify leverage, low redemptions restrictions, asset illiquidity, and reputational capital as a relevant set of characteristics that explain the exposure of hedge funds’ liquidity supply to funding conditions. Finally, we find that the trades of financially constrained hedge funds underperform for at least one quarter following negative funding shocks.","PeriodicalId":193237,"journal":{"name":"The shadow banking system (including hedge funds","volume":"28 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2020-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"12","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"The shadow banking system (including hedge funds","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.2239327","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 12
Abstract
The paper investigates the determinants of limits of arbitrage for liquidity providers. Using data on institutional transactions, we compare hedge fund trades to those of other institutions. We find that hedge funds’ liquidity provision is more exposed to financial conditions than that of other institutions. We identify leverage, low redemptions restrictions, asset illiquidity, and reputational capital as a relevant set of characteristics that explain the exposure of hedge funds’ liquidity supply to funding conditions. Finally, we find that the trades of financially constrained hedge funds underperform for at least one quarter following negative funding shocks.