IDEAS home Printed from https://ideas.repec.org/p/bca/bocadp/07-9.html
   My bibliography  Save this paper

Hedge Funds and Financial Stability: The State of the Debate

Author

Listed:
  • Michael R. King
  • Philipp Maier

Abstract

The authors review the state of the debate on hedge funds and the potential threat that hedge funds pose to financial stability. The collapse of a hedge fund or a group of hedge funds might pose a systemic risk directly by damaging systematically important financial institutions, or indirectly by increasing market volatility and generating a liquidity shock in key markets. Both the hedge fund sector and the prime brokerage industry supporting them are highly concentrated, with a small number of dominant players that have a complex business relationship. Therefore, while the potential for a systemic risk from the hedge fund sector is considered small, the potential for damage from such shocks may have increased due to the increased spread, complexity, and tighter linkages of the global financial system. Going forward, the relationship between large complex financial institutions and hedge funds must be monitored closely. In terms of policy, direct regulation that increases transparency - whether of counterparty exposures or trading positions - does not appear feasible, may create a moral-hazard problem, and may reduce overall market efficiency. Indirect regulation via prime brokers, market discipline, and improved riskmanagement practices are the most promising approaches for addressing potential risks from the hedge fund sector.

Suggested Citation

  • Michael R. King & Philipp Maier, 2007. "Hedge Funds and Financial Stability: The State of the Debate," Discussion Papers 07-9, Bank of Canada.
  • Handle: RePEc:bca:bocadp:07-9
    as

    Download full text from publisher

    File URL: http://www.bankofcanada.ca/en/res/dp/2007/dp07-9.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Roy, Francine, 2004. "Canada's Trade with China," Insights on the Canadian Economy 2004007e, Statistics Canada, Economic Analysis Division.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goknur Umutlu & Yilmaz Yildız, 2011. "The Effect of Global Liquidity on Macroeconomic Parameters," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(3), pages 167181-1671, September.
    2. Skold, Alida S., 2011. "Intended and Unintended Results of the Proposed Volcker Rule," MPRA Paper 35621, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial stability; Financial institutions; Financial system regulation and policies;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocadp:07-9. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.bank-banque-canada.ca/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.