Extremal Connectedness of Hedge Funds

35 Pages Posted: 7 Feb 2020 Last revised: 8 Dec 2021

See all articles by Linda Mhalla

Linda Mhalla

University of Lausanne, School of Economics and Business Administration (HEC Lausanne); University of Geneva, Geneva School of Economics and Management, Research Center for Statistics; HEC Montreal - Department of Decision Sciences

Julien Hambuckers

University of Liège - HEC Liège

Marie Lambert

University of Liège - HEC Liège

Date Written: December 2, 2021

Abstract

We propose a dynamic measure of extremal connectedness tailored to the short reporting
period and unbalanced nature of hedge funds data. Using multivariate extreme value regression techniques, we estimate this measure conditional on factors reflecting the economic uncertainty and the state of the financial markets, and derive several risk indicators reflecting the likelihood of extreme spillovers. Empirically, we study the dynamics of tail dependencies between hedge funds grouped per investment strategies, as well as with the banking sector. We show that during crisis periods, some pairs of strategies display an increase in their extremal connectedness, revealing a higher likelihood of simultaneous extreme losses. We also find a sizable tail dependence between hedge funds and banks, indicating that banks are much more likely to suffer extreme losses when the hedge fund sector does. Our results highlight that a proactive regulatory framework should account for the dynamic nature of the tail dependence and its link with financial stress.

Keywords: extreme value theory, systemic measure, tail dependence measure

JEL Classification: C58, C46, G23

Suggested Citation

Mhalla, Linda and Hambuckers, Julien and Lambert, Marie, Extremal Connectedness of Hedge Funds (December 2, 2021). Available at SSRN: https://ssrn.com/abstract=3519295 or http://dx.doi.org/10.2139/ssrn.3519295

Linda Mhalla

University of Lausanne, School of Economics and Business Administration (HEC Lausanne) ( email )

Lausanne, Vaud
Switzerland

University of Geneva, Geneva School of Economics and Management, Research Center for Statistics ( email )

Geneva
Switzerland
+41 379 82 12 (Phone)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Julien Hambuckers (Contact Author)

University of Liège - HEC Liège ( email )

rue Louvrex 14
Liège, 4000
Belgium

Marie Lambert

University of Liège - HEC Liège ( email )

rue Louvrex 14
Liège, 4000
Belgium

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