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Do Hedge Funds Reduce Idiosyncratic Risk?

Namho Kang, Péter Kondor () and Ronnie Sadka

No 2012_15, CEU Working Papers from Department of Economics, Central European University

Abstract: 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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http://www.personal.ceu.hu/staff/repec/pdf/2012_15.pdf Full text (application/pdf)
http://www.personal.ceu.hu/staff/repec/pdf/2012_15_appendix.pdf Appendix (application/pdf)

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Journal Article: Do Hedge Funds Reduce Idiosyncratic Risk? (2014) Downloads
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