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Liquidity Shocks and Hedge Fund Contagion

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  • Boyson, Nicole M.

    (Northeastern University)

  • Stahel, Christof W.

    (George Mason University)

  • Stulz, Rene M.

    (OH State University)

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    Abstract

    In Boyson, Stahel, and Stulz (2010), we investigate whether hedge funds experience worst return contagion-- that is, correlations in extremely poor returns that are over and above those expected from economic fundamentals. We find strong evidence of contagion among hedge funds using eight separate style indices for the period from January 1990 to October 2008: the probability of a worst return in a particular index is increasing in the number of other indices that also have extremely poor returns. We then show that large adverse shocks to asset and funding liquidity strongly increase the likelihood of this contagion. In this paper, we further investigate contagion between hedge funds and main markets. We uncover strong evidence of contagion between hedge funds and small-cap, mid-cap and emerging market equity indices, high yield bonds, emerging market bonds, and the Australian Dollar. Finally, we show that this contagion between hedge funds and markets is also significantly linked to liquidity shocks, especially for small-cap domestic equities, Asian equities, high yield bonds, and the Australian Dollar.

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    Bibliographic Info

    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-12.

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    Date of creation: Jun 2011
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    Handle: RePEc:ecl:ohidic:2011-12

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