RT Journal Article
SR Electronic
T1 Crowding and Liquidity Shocks
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 36
OP 61
DO 10.3905/jpm.2022.1.448
VO 49
IS 3
A1 Hector Chan
A1 Tony Tan
YR 2023
UL https://pm-research.com/content/49/3/36.abstract
AB The authors develop a model whose aim is to study the relationship between crowding and liquidity shocks. One of the main results of that model is that crowding is associated with a larger exposure to broader liquidity shocks on arbitrageurs. The authors confirm this link empirically by studying equity long–short strategies. They use short interest data both to identify liquidity shocks impacting sophisticated equity investors and to infer crowdedness for some of the well-known long–short equity factors. When liquidity shocks (such as the 2007 quant crisis or the more recent 2020 COVID-19–induced quant deleverage) occur, crowded strategies indeed tend to underperform.