Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy

George Aragon, Philip E. Strahan

Research output: Contribution to journalArticlepeer-review

91 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)570-587
Number of pages18
JournalJournal of Financial Economics
Volume103
Issue number3
DOIs
StatePublished - Mar 2012

Keywords

  • Hedge fund
  • Market and funding liquidity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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