Is There Hedge Fund Contagion
AbstractCalling contagion the dependence in the probability of occurrence of extreme returns across different hedge fund styles and asset classes that cannot be explained by correlation, we find no systematic evidence of contagion between monthly returns on eight hedge fund styles and equity, bond, and currency markets. In contrast, the average probability that a style index has a return in the lower 10% tail increases from 1.67% to 39.92% as the number of other styles indices with a return in the lower 10% tail increases from 0 to 7. To explain this strong evidence of contagion across hedge fund styles, we investigate how the intensity of contagion depends on various proxies for funding liquidity and asset liquidity. We find that hedge fund contagion is magnified when prime brokerage firms have poor performance (which we would expect to affect hedge fund funding liquidity adversely) and when asset market liquidity is low. Commodity Trading Advisors (CTAs) are not subject to hedge fund contagion.
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- Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2006. "Is There Hedge Fund Contagion?," NBER Working Papers 12090, National Bureau of Economic Research, Inc.
- Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene M., 2006. "Is There Hedge Fund Contagion?," Working Paper Series 2006-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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