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- Publisher Website: 10.1016/j.jfineco.2011.06.005
- Scopus: eid_2-s2.0-82455212987
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Article: The fragile capital structure of hedge funds and the limits to arbitrage
Title | The fragile capital structure of hedge funds and the limits to arbitrage |
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Authors | |
Keywords | Fragile capital structure Market liquidity Limits to arbitrage Coordination risk |
Issue Date | 2011 |
Citation | Journal of Financial Economics, 2011, v. 102, n. 3, p. 491-506 How to Cite? |
Abstract | During a financial crisis, when investors are most in need of liquidity and accurate prices, hedge funds cut their arbitrage positions and hoard cash. The paper explains this phenomenon. We argue that the fragile nature of the capital structure of hedge funds, combined with low market liquidity, creates a risk of coordination in redemptions among hedge fund investors that severely limits hedge funds' arbitrage capabilities. We present a model of hedge funds' optimal asset allocation in the presence of coordination risk among investors. We show that hedge fund managers behave conservatively and even abstain from participating in the market once coordination risk is factored into their investment decisions. The model suggests a new source of limits to arbitrage. © 2011 Elsevier B.V. |
Persistent Identifier | http://hdl.handle.net/10722/279309 |
ISSN | 2023 Impact Factor: 10.4 2023 SCImago Journal Rankings: 13.655 |
SSRN | |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Liu, Xuewen | - |
dc.contributor.author | Mello, Antonio S. | - |
dc.date.accessioned | 2019-10-28T03:02:16Z | - |
dc.date.available | 2019-10-28T03:02:16Z | - |
dc.date.issued | 2011 | - |
dc.identifier.citation | Journal of Financial Economics, 2011, v. 102, n. 3, p. 491-506 | - |
dc.identifier.issn | 0304-405X | - |
dc.identifier.uri | http://hdl.handle.net/10722/279309 | - |
dc.description.abstract | During a financial crisis, when investors are most in need of liquidity and accurate prices, hedge funds cut their arbitrage positions and hoard cash. The paper explains this phenomenon. We argue that the fragile nature of the capital structure of hedge funds, combined with low market liquidity, creates a risk of coordination in redemptions among hedge fund investors that severely limits hedge funds' arbitrage capabilities. We present a model of hedge funds' optimal asset allocation in the presence of coordination risk among investors. We show that hedge fund managers behave conservatively and even abstain from participating in the market once coordination risk is factored into their investment decisions. The model suggests a new source of limits to arbitrage. © 2011 Elsevier B.V. | - |
dc.language | eng | - |
dc.relation.ispartof | Journal of Financial Economics | - |
dc.subject | Fragile capital structure | - |
dc.subject | Market liquidity | - |
dc.subject | Limits to arbitrage | - |
dc.subject | Coordination risk | - |
dc.title | The fragile capital structure of hedge funds and the limits to arbitrage | - |
dc.type | Article | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.jfineco.2011.06.005 | - |
dc.identifier.scopus | eid_2-s2.0-82455212987 | - |
dc.identifier.volume | 102 | - |
dc.identifier.issue | 3 | - |
dc.identifier.spage | 491 | - |
dc.identifier.epage | 506 | - |
dc.identifier.isi | WOS:000296598500002 | - |
dc.identifier.ssrn | 1397303 | - |
dc.identifier.issnl | 0304-405X | - |