Margins and Hedge Fund Contagion

57 Pages Posted: 21 Mar 2009 Last revised: 13 May 2013

See all articles by Evan Dudley

Evan Dudley

Queen's University - Smith School of Business

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate

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

Dudley, Evan and Nimalendran, Mahendrarajah, Margins and Hedge Fund Contagion (May 16, 2011). Journal of Financial and Quantitative Analysis (JFQA), Vol. 46, No. 5, 2011. Available at SSRN: https://ssrn.com/abstract=1364353 or http://dx.doi.org/10.2139/ssrn.1364353

Evan Dudley (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

Mahendrarajah Nimalendran

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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