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Hedge funds and their implications for financial stability

Author

Listed:
  • Garbaravicius, Tomas
  • Dierick, Frank

Abstract

The paper provides an overview of the hedge fund industry, mainly from a financial stability and European angle. It is primarily based on an extensive analysis of information from the TASS database. On the positive side of the financial stability assessment, hedge funds have a role as providers of diversification and liquidity, and they contribute to the integration and completeness of financial markets. Possible negative effects occur through their impact on financial markets (e.g. via crowded trades) and financial institutions (e.g. via prime brokerage). Several initiatives have been launched to address these concerns and most of them follow indirect regulation via banks. If any direct regulation were to be considered, it would probably have to be implemented in a coordinated manner at the international level. At the EU level there is currently no common regulatory regime, although some Member States have adopted national legislation. JEL Classification: G15, G18, G21, G23, G24

Suggested Citation

  • Garbaravicius, Tomas & Dierick, Frank, 2005. "Hedge funds and their implications for financial stability," Occasional Paper Series 34, European Central Bank.
  • Handle: RePEc:ecb:ecbops:200534
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecbocp34.pdf
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    References listed on IDEAS

    as
    1. Schönenberger, Andreas & Schmiedel, Heiko, 2005. "Integration of securities market infrastructure in the euro area," Occasional Paper Series 33, European Central Bank.
    2. Heiko Schmiedel & Andreas Schönenberger, 2005. "Integration of securities market infrastructures in the euro area," Occasional Paper Series 33, European Central Bank.
    3. Tomas Garbaravicius & Frank Dierick, 2005. "Hedge funds and their implications for financial stability," Occasional Paper Series 34, European Central Bank.
    4. Sturm, Michael & Siegfried, Nikolaus, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
    5. Michael Sturm & Nikolaus Siegfried, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
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    Citations

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    Cited by:

    1. 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.
    2. Bengtsson, E., 2013. "Fund Management and Systemic Risk - Lessons from the Global Financial Crisis," CITYPERC Working Paper Series 2013-06, Department of International Politics, City University London.
    3. Benton E. Gup (ed.), 2010. "The Financial and Economic Crises," Books, Edward Elgar Publishing, number 13642.
    4. Frank Dierick & Fatima Pires & Martin Scheicher & Kai Gereon Spitzer, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.
    5. Gregory Connor & Sheng Li, 2009. "Market Dispersion and the Profitability of Hedge Funds," Economics, Finance and Accounting Department Working Paper Series n2000109.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    6. Bussière, Matthieu & Hoerova, Marie & Klaus, Benjamin, 2015. "Commonality in hedge fund returns: Driving factors and implications," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 266-280.
    7. Mark A. Carlson & Jason Steinman, 2008. "Market conditions and hedge fund survival," Finance and Economics Discussion Series 2008-28, Board of Governors of the Federal Reserve System (U.S.).
    8. Reinhard Petschnigg, 2005. "The institutional framework for financial market policy in the USA seen from an EU perspective," Occasional Paper Series 35, European Central Bank.
    9. René M. Stulz, 2007. "Hedge Funds: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 175-194, Spring.
    10. Adalbert Winkler & Roland Beck, 2006. "Macroeconomic and financial stability challenges for acceding and candidate countries," Occasional Paper Series 48, European Central Bank.
    11. Tomas Garbaravicius & Frank Dierick, 2005. "Hedge funds and their implications for financial stability," Occasional Paper Series 34, European Central Bank.
    12. Calza, Alessandro & de Bondt, Gabe & Van Rixtel, Adrian & Scopel, Silvia & Marqués-Ibáñez, David & Be Duc, Louis, 2005. "Financing conditions in the euro area," Occasional Paper Series 37, European Central Bank.
    13. Navin Beekarry, 2010. "Hedge Funds and Offshore Financial Centers: New Challenges for the Regulation of Systemic Risks," Chapters,in: The Financial and Economic Crises, chapter 11 Edward Elgar Publishing.
    14. Petschnigg, Reinhard, 2005. "The institutional framework for financial market policy in the USA seen from an EU perspective," Occasional Paper Series 35, European Central Bank.
    15. King, Michael R. & Maier, Philipp, 2009. "Hedge funds and financial stability: Regulating prime brokers will mitigate systemic risks," Journal of Financial Stability, Elsevier, vol. 5(3), pages 283-297, September.
    16. Louis Bê Duc & Gabe de Bondt & Alessandro Calza & David Marqués Ibáñez & Adrian van Rixtel & Silvia Scopel, 2005. "Financing conditions in the euro area," Occasional Paper Series 37, European Central Bank.
    17. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2007. "Das Erreichte nicht verspielen. Jahresgutachten 2007/08," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 200708.
    18. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
    19. Dierick, Frank & Pires, Fatima & Scheicher, Martin & Spitzer, Kai Gereon, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.

    More about this item

    Keywords

    asset management; crowded trades; financial regulation; Financial Stability; hedge funds; prime brokerage; risk management;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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