Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis

Research output: Working paperOther research output

Abstract

In this paper, we show that hedge funds repurchased a large amount of liquid stocks and continued to sell illiquid stocks as the 2008 financial crisis mitigated. It complements existing empirical evidence that institutional investors sold more liquid than illiquid assets during the crisis period. This new empirical evidence confirms the trade-off in theoretical literature between selling liquid assets to minimize contemporary trading costs and selling illiquid assets to keep a "liquidity cushion" (e.g. Scholes 2000; Duffie and Ziegler 2003; Brown, Carlin, and Lobo 2010). Consistently, hedge funds' portfolio composition shows a delayed "flight to liquidity'': the proportion of hedge funds' liquid stock holdings decreased slightly at the peak of the crisis and then increased substantially to a highest level ever since 2007. For comparison, we show that pension funds have a nearly constant portfolio composition of liquid versus illiquid stocks through the entire crisis.
Original languageEnglish
Place of PublicationTilburg
PublisherNETSPAR
Number of pages40
Publication statusPublished - 2017

Publication series

NameNetspar Discussion Paper
Volume08/2017-012

Fingerprint

Financial crisis
Hedge funds
Liquidity management
Assets
Empirical evidence
Liquidity
Portfolio composition
Trading costs
Institutional investors
Trade-offs
Pension funds
Proportion

Keywords

  • liquidity management
  • hedge funds
  • flight to liquidity
  • price impact

Cite this

Driessen, J., & Xing, R. (2017). Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis. (Netspar Discussion Paper; Vol. 08/2017-012). Tilburg: NETSPAR.
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Driessen, J & Xing, R 2017 'Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis' Netspar Discussion Paper, vol. 08/2017-012, NETSPAR, Tilburg.

Myopic or Dynamic Liquidity Management? A Study of Hedge Funds around the 2008 Financial Crisis. / Driessen, Joost; Xing, R.

Tilburg : NETSPAR, 2017. (Netspar Discussion Paper; Vol. 08/2017-012).

Research output: Working paperOther research output

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