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Are hedge funds active market liquidity timers?

journal contribution
posted on 14.11.2019 by Chenlu Li, Baibing Li, Kai-Hong Tee

This paper investigates liquidity timing behaviour of hedge funds that invest globally in foreign investment assets. We expect these hedge funds to manage currencies exposure differently, depending on the extent they treat them as an asset class. In this paper, we investigate if actively timing foreign exchange (FX) liquidity adds value to hedge funds’ investments. Unlike the existing studies where fund managers are assumed to either time or not time the market over the entire study period, we argue that fund managers may strategically choose to be active market liquidity timers based on the market condition at the time. To test this hypothesis, we develop a state-dependent liquidity timing model embedded with a Markov regime switching process and identify changes in the FX liquidity timing behaviour among the Global Derivatives hedge funds over an eighteen-year period. Our findings reveal that such regime changes in timing behaviour are driven by the underlying FX liquidity condition. A further analysis to compare the changes in the timing behaviour over time shows that hedge funds that are active market liquidity timers outperform those that engage in liquidity timing less frequently in all strategies categories.


History

School

  • Business and Economics

Department

  • Business

Published in

International Review of Financial Analysis

Volume

67

Publisher

Elsevier

Version

AM (Accepted Manuscript)

Rights holder

© Elsevier Inc.

Publisher statement

This paper was accepted for publication in the journal International Review of Financial Analysis and the definitive published version is available at https://doi.org/10.1016/j.irfa.2019.101415

Acceptance date

06/11/2019

Publication date

2019-11-08

Copyright date

2020

ISSN

1057-5219

Language

en

Depositor

Prof Baibing Li Deposit date: 12 November 2019

Article number

101415

Exports