The Volcker Rule and the hedge fund liquidity circle

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The implementation of the Volcker Rule (section 619 of the 2010 Dodd-Frank Act)
profoundly impacts the funding liquidity of hedge funds, their liquidity risk exposure and liquidity provision to the market. Analysing a sample of 5,697 hedge funds, we find that following the legislation, capital flows to hedge funds decline, and their flow-performance sensitivity increases. Hedge funds reduce their market liquidity exposure and realign their market-making activities towards the most liquid stocks. These results support the Brunnermeier-Pedersen model of illiquidity spirals.
Original languageEnglish
Publication statusPublished - 2022


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