Lecture: Can Hedge Funds Time Market Liquidity?
September 18, 2009
1:30 - 3:00pm
Location: | SOM 112 (wheelchair accessible) |
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Contact: |
Thomas O'Brien, (413) 545-5581, tobrien@som.umass.edu |
Finance Professor Bing Liang will be the guest speaker at this week's Finance Seminar. All are invited to attend.
He will be presenting his paper "Can Hedge Funds Time Market Liquidity?".
This paper examines how hedge funds manage their liquidity risk by responding to the aggregate liquidity shock. Using a large sample of hedge funds over the period of 1994-2008, we find strong evidence that hedge fund managers possess liquidity timing ability at both investment strategy level and the individual fund level. They increase (decrease) market exposures when the marketwide liquidity is high (low). More importantly, the liquidity timing evidence is particularly stronger among funds with illiquid holdings. In contrast, hedge fund managers who hold liquid assets tend to react to past liquidity conditions passively. The liquidity timing ability is also asymmetric: it is more pronounced when the marketwide liquidity is low than when it is high. Our results are robust even after we control for return- and volatility-timing abilities. A bootstrap analysis further reenforces our finding that the liquidity timing ability of hedge fund managers is attributed to their skill, rather than luck. Finally, investing in the top liquidity timers can generate economically significant profits.
More information about Prof. Bing Liang.
