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

See all articles by Nicole M. Boyson

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business

Christof W. Stahel

Independent

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

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

Boyson, Nicole M. and Stahel, Christof W. and Stulz, Rene M., Liquidity Shocks and Hedge Fund Contagion (August 25, 2011). 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. Available at SSRN: https://ssrn.com/abstract=1868569

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)

Christof W. Stahel

Independent ( email )

No Address Available

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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