Liquidity Shocks and Hedge Fund Contagion
Fisher College of Business Working Paper No. 2011-03-012
Charles A. Dice Center Working Paper No. 2011-12
Journal of Investment Management, Q2, 2012
33 Pages Posted: 21 Jun 2011 Last revised: 4 Dec 2012
There are 2 versions of this paper
Liquidity Shocks and Hedge Fund Contagion
Liquidity Shocks and Hedge Fund Contagion
Date Written: August 25, 2011
Abstract
In Boyson, Stahel, and Stulz (2010), we investigate whether hedge funds experience worst return contagion – that is, correlations in extremely poor returns that are over and above those expected from economic fundamentals. We find strong evidence of contagion among hedge funds using eight separate style indices for the period from January 1990 to October 2008: the probability of a worst return in a particular index is increasing in the number of other indices that also have extremely poor returns. We then show that large adverse shocks to asset and funding liquidity strongly increase the likelihood of this contagion. In this paper, we further investigate contagion between hedge funds and main markets. We uncover strong evidence of contagion between hedge funds and small-cap, mid-cap and emerging market equity indices, high yield bonds, emerging market bonds, and the Australian Dollar. Finally, we show that this contagion between hedge funds and markets is also significantly linked to liquidity shocks, especially for small-cap domestic equities, Asian equities, high yield bonds, and the Australian Dollar.
Keywords: Hedge Funds, Extreme Returns, Contagion, System Risk
JEL Classification: G11, G12, G18
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Illiquidity and Stock Returns: Cross-Section and Time-Series Effects
By Yakov Amihud
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Liquidity Risk and Expected Stock Returns
By Lubos Pastor and Robert F. Stambaugh
-
Is Information Risk a Determinant of Asset Returns?
By David Easley, Soeren Hvidkjaer, ...
-
By Tarun Chordia, Avanidhar Subrahmanyam, ...
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi
-
Common Factors in Prices, Order Flows and Liquidity
By Joel Hasbrouck and Duane J. Seppi