Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy

George O. Aragon and Philip E. Strahan

Journal of Financial Economics, 2012, vol. 103, issue 3, 570-587

Abstract: Hedge funds using Lehman as prime broker faced a decline in funding liquidity after the September 15, 2008 bankruptcy. We find that stocks held by these Lehman-connected funds experienced greater declines in market liquidity following the bankruptcy than other stocks; the effect was larger for ex ante illiquid stocks and persisted into the beginning of 2009. We find no similar effects surrounding the Bear Stearns failure, suggesting that disruptions surrounding bankruptcy explain the liquidity effects. We conclude that shocks to traders' funding liquidity reduce the market liquidity of the assets that they trade.

Keywords: Hedge fund; Market and funding liquidity (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (98)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:3:p:570-587

DOI: 10.1016/j.jfineco.2011.10.004

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