The Volcker Rule and the Hedge Fund Liquidity Circle
Michael Bowe Olga Kolokolova Lijie Yu
The implementation of the Volcker Rule (section 619 of the 2010 Dodd-Frank Act)profoundly impacts the funding liquidity of hedge funds their liquidity risk exposureand liquidity provision to the market. Analysing a sample of 5697 hedge funds we find that following the legislation capital flows to hedge funds decline and their flow-performance sensitivity increases. Hedge funds reduce their market liquidity exposure and realign their market-making activities towards the most liquid stocks. These results support the Brunnermeier-Pedersen model of illiquidity spirals.
G1 G18 G2 G23 G28
Volcker Rule Hedge funds Liquidity risk Liquidity provision Fund flows