Hedge Fund Return Dependence and Liquidity Spirals

Zykaj, Blerina Bela; Sias, Richard W.; Turtle, Harry J.

doi:10.2139/ssrn.2358466

Hedge Fund Return Dependence and Liquidity Spirals

71 Pages Posted: 23 Nov 2013 Last revised: 21 Nov 2014

See all articles by Blerina Bela Zykaj

Richard W. Sias

University of Arizona - Department of Finance

Harry J. Turtle

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