Affiliation:
1. CUHK Business School, The Chinese University of Hong Kong , Cheng Yu Tung Building, 12 Chak Cheung Street , Sha Tin, N.T., Hong Kong S.A.R
Abstract
Abstract
I test the hypothesis that the use of leverage by market speculators can increase the likelihood and magnitude of crashes in asset prices. Using a direct leverage measure derived from US public filings, I find that (1) stocks held by highly leveraged hedge funds subsequently have more negatively skewed returns than stocks held by less leveraged funds and (2) upon extremely negative earnings surprises or funding liquidity shocks, stocks owned by high-leverage funds exhibit abnormal price declines and subsequent reversal. Consistent with the fire sale and contagion hypothesis, high-leverage funds tend to reduce the position following negative news about a stock, and such selling can extend to other stocks in the portfolio, increasing the crash proneness of the stocks they hold.
Funder
Whitebox Advisors Doctoral Fellowship
Publisher
Oxford University Press (OUP)
Subject
Finance,Economics and Econometrics,Accounting
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