Publication Type
Journal Article
Version
Publisher’s Version
Publication Date
8-2013
Abstract
We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.
Keywords
Hedge funds, Liquidity timing, Investment value, Liquidity reaction, Performance persistence
Discipline
Finance and Financial Management
Publication
Journal of Financial Economics
Issue
2
First Page
493
Last Page
516
ISSN
0304-405X
Identifier
10.1016/j.jfineco.2013.03.009
Publisher
Elsevier
Citation
CAO, Charles; CHEN, Yong; LIANG, Bing; and LO, Andrew W..
(2013). Research Collection BNP Paribas Hedge Fund Centre. Journal of Financial Economics
, 109(2)
, 493.
Available at: https://ink.library.smu.edu.sg/bnp_research/11
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Working paper version
Additional URL
https://doi.org/10.1016/j.jfineco.2013.03.009