The Impact of Hedge Funds on Asset Markets

Andrew Patton and Mathias Kruttli
Authors registered in the RePEc Author Service: Tarun Ramadorai

No 10151, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides empirical evidence of the impact of hedge funds on asset markets. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model based on liquidity provision by hedge funds to noise traders to rationalize our findings, and empirically verify auxiliary predictions of the model.

Keywords: Bonds; Currencies; Equities; Hedge funds; Liquidity; Return predictability (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G23 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The Impact of Hedge Funds on Asset Markets (2015)
Working Paper: The Impact of Hedge Funds on Asset Markets (2013)
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