Survival of Hedge Funds: Frailty vs Contagion

75 Pages Posted: 22 Dec 2012 Last revised: 15 Jun 2015

See all articles by Serge Darolles

Serge Darolles

Université Paris Dauphine - DRM-CEREG

Patrick Gagliardini

USI Università della Svizzera italiana; Swiss Finance Institute

Christian Gourieroux

University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Date Written: December 15, 2013

Abstract

We develop a new methodology to analyse the dynamics of liquidation risk dependence in the hedge funds industry. This dependence results either from a common exogenous factor, or from conta- gion phenomena caused by an endogenous behaviour of fund managers. Our empirical analysis shows that the common factor, the sensitivities to this factor and the contagion scheme can be interpreted in terms of liquidity risks. The factor is related nonlinearly to rollover and margin funding liquidity risks. The sensitivities to the factor are funding liquidity risk exposures, which depend on the redemption and leverage policies of fund managers. The causal scheme captures the reinforcing spiral between funding and market liquidity.

Keywords: Hedge Fund, Contagion, Systemic Risk, Stress-Tests, Funding Liquidity

JEL Classification: G12, C23

Suggested Citation

Darolles, Serge and Gagliardini, Patrick and Gourieroux, Christian, Survival of Hedge Funds: Frailty vs Contagion (December 15, 2013). Available at SSRN: https://ssrn.com/abstract=2192401 or http://dx.doi.org/10.2139/ssrn.2192401

Serge Darolles (Contact Author)

Université Paris Dauphine - DRM-CEREG ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Patrick Gagliardini

USI Università della Svizzera italiana ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Christian Gourieroux

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4349 (Phone)
416-978-6713 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE) ( email )

15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
33.4117.7666 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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