Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/87269 
Year of Publication: 
2011
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 11-150/2/DSF27
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We examine whether the drastic improvement in liquidity in the US stockmarket after 2003 has impacted the systematic exposures of hedge funds to theUS-stock market. The relation between market exposure and Amihud’s illiquiditymeasure reverses significantly around a breakpoint situated somewherearound 2003. The results are robust to different fund selection criteria, volatilitytiming, the presence of illiquid holdings and the exact position of the breakpoint. Using the returns to a pairs trading strategy as a sorting criterion forcreating portfolios, we find that the effect is strongest for funds that have a significantlypositive loading on the pairs trading return. The results suggest thatbefore 2003, time-varying illiquidity led to a time-varying long bias in US-stockmarket exposure. The reversal of the relationship points towards liquidity timingby hedge funds in the most recent period, after the introduction of automatedtrading on the New York stock exchange in March 2003.
Subjects: 
hedge funds
market liquidity
limits to arbitrage
liquidity timing
JEL: 
G12
G23
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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