NY Fed: Funding liquidity explains investor hedging behaviour
A New York Federal Reserve paper published in July shows that funding liquidity constraints lead investors to hedge against shocks, leading to lower returns in the long run.
Tobias Adrian and Erkko Etula, the paper's authors, use an inter-temporal capital asset pricing model (ICAPM) to investigate the extent to which deviations from the cross-sectional predictions can be explained by the hedging considerations of long-term investors.
They argue that during times of abundant funding liquidity
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