Margins and Hedge Fund Contagion
57 Pages Posted: 21 Mar 2009 Last revised: 13 May 2013
Date Written: May 16, 2011
Abstract
Funding risk measures the extent to which a fund can borrow money by posting collateral. Using a novel measure of funding risk based on futures margins, we are able to empirically identify the mechanism by which changes in funding risk affect the likelihood of contagion. An increase in margins of the order of magnitude observed during the subprime crisis increases the probability of contagion among certain types of funds by up to 34%. Our analysis shows that some types of hedge funds are more vulnerable to contagion than others. Our results also suggest that policies that limit the magnitude of changes in margins over short periods of time may reduce the likelihood of contagion among hedge funds.
Keywords: Hedge fund, contagion, asymmetric correlation, copula, market liquidity, funding liquidity, exceedance correlation
JEL Classification: G11, G24
Suggested Citation: Suggested Citation
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