Systemic Risk Channels of Asset Managers: Evidence from Hedge Funds and Mutual Funds

49 Pages Posted: 13 Jul 2020

Date Written: June 19, 2020

Abstract

Using a sample of hedge funds and mutual funds, I examine two channels through which asset managers can contribute to systemic risk: the service channel when funds act as liquidity suppliers and the asset liquidation channel when funds act as liquidity demanders. Consistent with the latter channel being more important, I find that contributions to systemic risk increase significantly when hedge funds demand liquidity. Conversely, no such effect exists for mutual funds. A decomposition of systemic risk reveals that the higher level of systemic risk for liquidity-demanding hedge funds can be explained by a higher degree of interconnectedness. Providing further evidence for the asset liquidation channel, I document that systemic risk is considerably larger when hedge funds demand liquidity in times of low funding liquidity and during stock market boom and bust phases.

Keywords: Systemic Risk, Hedge Funds, Mutual Funds, Liquidity

JEL Classification: G23, G28

Suggested Citation

Greppmair, Stefan, Systemic Risk Channels of Asset Managers: Evidence from Hedge Funds and Mutual Funds (June 19, 2020). Available at SSRN: https://ssrn.com/abstract=3631115 or http://dx.doi.org/10.2139/ssrn.3631115

Stefan Greppmair (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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