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Hedge Fund Contagion and Liquidity Shocks

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  • NICOLE M. BOYSON
  • CHRISTOF W. STAHEL
  • RENÉ M. STULZ
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    Abstract

    Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to asset and hedge fund liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns. Copyright (c) 2010 the American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 5 (October)
    Pages: 1789-1816

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1789-1816

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    Cited by:
    1. Teo, Melvyn, 2011. "The liquidity risk of liquid hedge funds," Journal of Financial Economics, Elsevier, vol. 100(1), pages 24-44, April.
    2. Dungey, Mardi & Milunovich, George & Thorp, Susan & Yang, Minxian, 2012. "Endogenous crisis dating and contagion using smooth transition structural GARCH," Working Papers 15030, University of Tasmania, School of Economics and Finance, revised 29 Aug 2012.
    3. Namho Kang & Peter Kondor & Ronnie Sadka, 2012. "Do Hedge Funds Reduce Idiosyncratic Risk?," CEU Working Papers 2012_15, Department of Economics, Central European University, revised 04 Oct 2012.
    4. Charles Cao & Lubomir Petrasek, 2011. "Liquidity risk and hedge fund ownership," Finance and Economics Discussion Series 2011-49, Board of Governors of the Federal Reserve System (U.S.).
    5. Hong-Ghi Min & Young-Soon Hwang, 2012. "Dynamic correlation analysis of US financial crisis and contagion: evidence from four OECD countries," Applied Financial Economics, Taylor & Francis Journals, vol. 22(24), pages 2063-2074, December.
    6. Kang, Namho & Kondor, Péter & Sadka, Ronnie, 2011. "Idiosyncratic Return Volatility in the Cross-Section of Stocks," CEPR Discussion Papers 8307, C.E.P.R. Discussion Papers.
    7. Anginer, Deniz & Demirguc-Kunt, Asli, 2011. "Has the global banking system become more fragile over time ?," Policy Research Working Paper Series 5849, The World Bank.
    8. Charlotte Christiansen, 2013. "Classifying Returns as Extreme: European Stock and Bond Markets," CREATES Research Papers 2013-37, School of Economics and Management, University of Aarhus.
    9. Chouliaras, Andreas & Grammatikos, Theoharry, 2013. "News Flow, Web Attention and Extreme Returns in the European Financial Crisis," MPRA Paper 51335, University Library of Munich, Germany.
    10. Lee, Hee Soo & Kim, Tae Yoon, 2014. "Dynamic prediction of hedge fund survival in crisis-prone financial markets," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 57-67.
    11. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.
    12. Konermann, Patrick & Meinerding, Christoph & Sedova, Olga, 2013. "Asset allocation in markets with contagion: The interplay between volatilities, jump intensities, and correlations," Review of Financial Economics, Elsevier, vol. 22(1), pages 36-46.
    13. Akay, Ozgur (Ozzy) & Senyuz, Zeynep & Yoldas, Emre, 2013. "Hedge fund contagion and risk-adjusted returns: A Markov-switching dynamic factor approach," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 16-29.
    14. Khaled Guesmi & Saoussen Jebri & Abdelkarim Jabri & Frédéric Teulon, 2014. "Are hedge funds uncorrelated with financial markets? An empirical assessment," Working Papers 2014-103, Department of Research, Ipag Business School.
    15. Liu, Xuewen & Mello, Antonio S., 2011. "The fragile capital structure of hedge funds and the limits to arbitrage," Journal of Financial Economics, Elsevier, vol. 102(3), pages 491-506.
    16. Sadka, Ronnie, 2010. "Liquidity risk and the cross-section of hedge-fund returns," Journal of Financial Economics, Elsevier, vol. 98(1), pages 54-71, October.
    17. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2011. "Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors," Working Papers 2011_21, Department of Economics, University of Venice "Ca' Foscari".
    18. Adams, Zeno & Glück, Thorsten, 2013. "Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79949, Verein für Socialpolitik / German Economic Association.
    19. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.
    20. Serge Darolles & Patrick Gagliardini & Christian Gouriéroux, 2012. "Survival of Hedge Funds : Frailty vs Contagion," Working Papers 2012-36, Centre de Recherche en Economie et Statistique.

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