Systemic Risk Channels of Asset Managers: Evidence from Hedge Funds and Mutual Funds
49 Pages Posted: 13 Jul 2020
Date Written: June 19, 2020
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: Suggested Citation