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Hedge Fund Contagion and Liquidity ShocksNicole M. BoysonNortheastern University - Finance and Insurance Area Christof W. StahelUS Securities & Exchange Commission - Division of Risk, Strategy and Financial Innovation Rene M. StulzOhio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) January 1, 2010 Journal of Finance, Vol. 55, No. 5, pp. 1789-1816, October 2010 Abstract: Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to funding and asset liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns.
Number of Pages in PDF File: 60 Keywords: Hedge funds, Extreme returns, Contagion, Systemic risk JEL Classification: G11, G12, G18 Accepted Paper SeriesDate posted: March 15, 2006 ; Last revised: December 4, 2012Suggested CitationContact Information
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