Hedge Fund Return Dependence and Liquidity Spirals
71 Pages
Posted: 23 Nov 2013
Last revised: 21 Nov 2014
Clemson University
University of Arizona - Department of Finance
Colorado State University, Fort Collins - Department of Finance & Real Estate
Date Written: November 20, 2014
Abstract
Different types of hedge funds tend to suffer poor abnormal returns simultaneously. Moreover, the likelihood of clustering in hedge fund left tail abnormal returns is positively related to negative liquidity shocks. These patterns have been interpreted as evidence that hedge funds suffer from liquidity shock induced contagion. We provide novel tests that demonstrate these patterns result from model misspecification and time-varying heteroskedasticity rather than liquidity shock induced contagion. Our results have important implications for understanding how markets function, the role of hedge funds in markets, and hedge fund regulation.
Keywords: Hedge funds; contagion; liquidity shocks
JEL Classification: G01, G12, G14, G18, G23
Suggested Citation:
Suggested Citation
Zykaj, Blerina Bela and Sias, Richard W. and Turtle, Harry J., Hedge Fund Return Dependence and Liquidity Spirals (November 20, 2014). Available at SSRN: https://ssrn.com/abstract=2358466 or http://dx.doi.org/10.2139/ssrn.2358466
