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The Volcker Rule and the Hedge Fund Liquidity Circle

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Author
Michael Bowe Olga Kolokolova Lijie Yu
Category
Financial
Date Posted
2019/11/25
Date Retrieved
2022/09/24
Date Revised
Date Written
2019/11/13
Description
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.
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JEL Classifications
G1 G18 G2 G23 G28
Keywords
Volcker Rule Hedge funds Liquidity risk Liquidity provision Fund flows
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Pages
73
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398
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4228517
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