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Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Publication Date
Volume
103
Issue
3
Identifiers
DOI: 10.1016/j.jfineco.2011.10.004
Keywords
  • Hedge Fund
  • Market And Funding Liquidity

Abstract

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.

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