Journal of Financial and Quantitative Analysis Vol. 49 No. 4 2014
Do Hedge Funds Reduce Idiosyncratic Risk?
Abstract
This paper studies the effect of hedge-fund trading on idiosyncratic risk. We hypothesize that while hedge-fund activity would often reduce idiosyncratic risk, high initial levels of idiosyncratic risk might be further amplified due to fund loss limits. Panel-regression analyses provide supporting evidence for this hypothesis. The results are robust to sample selection and are further corroborated by a natural experiment using the Lehman bankruptcy as an exogenous adverse shock to hedge-fund trading. Hedge-fund capital also explains the increased idiosyncratic volatility of high-idiosyncratic-volatility stocks as well as the decreased idiosyncratic volatility of low-idiosyncratic-volatility stocks over the past few decades.
- DOI
- 10.1017/s0022109014000556
- Volume
- 49
- Issue
- 4
- Pages
- 843-877
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref