What Constrains Liquidity Provision? Evidence from Institutional Trades. (9th July 2020)

• Record Type: Journal Article
• Authors: Çötelioğlu, Efe; Franzoni, Francesco; Plazzi, Alberto
• Is Part Of: Review of finance. Volume 25:Number 2(2021)
• Page Start: 485
• Page End: 517
• Publication Date: 2020-07-09
• Subjects: G20 -- G23; Liquidity provision -- Limits of arbitrage -- Hedge funds -- Mutual funds -- Resilience; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfaa016
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: The article studies liquidity provision by institutional investors using trade-level data. We find that hedge fund trades are a more important predictor of stock-level liquidity than mutual fund trades. However, hedge funds' liquidity provision is more exposed to financial conditions than that of mutual funds. Hedge funds that are more constrained in terms of leverage, age, asset illiquidity, and past performance exhibit a stronger shift toward liquidity consumption when funding condition tighten. Stocks with more exposure to constrained liquidity providing hedge funds suffered more during the financial crisis.