Hedge funds, financial intermediation, and systemic risk
AbstractHedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such as their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark against financial market disruptions with potential systemic consequences has been the set of counterparty credit risk management (CCRM) practices by the core of regulated institutions. The characteristics of hedge funds make CCRM more difficult as they exacerbate market failures linked to agency problems, externalities, and moral hazard. While various market failures may make CCRM imperfect, it remains the best line of defense against systemic risk.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 291.
Date of creation: 2007
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Other versions of this item:
- John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-18.
- NEP-ALL-2007-08-08 (All new papers)
- NEP-FMK-2007-08-08 (Financial Markets)
- NEP-RMG-2007-08-08 (Risk Management)
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