Do Hedge Funds Reduce Idiosyncratic Risk?
Péter Kondor () and
No 2012_15, CEU Working Papers from Department of Economics, Central European University
This paper studies the effect of hedge-fund trading on idiosyncratic risk. We hypothesize that while hedge-fund activity would often reduce idiosyncratic risk, high initial levels of idiosyncratic risk might be further amplified due to fund loss limits. Panel-regression analyses provide supporting evidence for this hypothesis. The results are robust to sample selection and are further corroborated by a natural experiment using the Lehman bankruptcy as an exogenous adverse shock to hedge-fund trading. Hedge-fund capital also explains the increased idiosyncratic volatility of high-idiosyncratic-volatility stocks as well as the decreased idiosyncratic volatility of low-idiosyncratic-volatility stocks over the past few decade.
New Economics Papers: this item is included in nep-rmg
Date: 2012-10-04, Revised 2012-10-04
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Journal Article: Do Hedge Funds Reduce Idiosyncratic Risk? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ceu:econwp:2012_15
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