Hedge Fund Contagion and Liquidity Shocks

60 Pages Posted: 15 Mar 2006 Last revised: 4 Dec 2012

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business

Christof W. Stahel

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

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Date Written: January 1, 2010

Abstract

Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to funding and asset liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns.

Keywords: Hedge funds, Extreme returns, Contagion, Systemic risk

JEL Classification: G11, G12, G18

Suggested Citation

Boyson, Nicole M. and Stahel, Christof W. and Stulz, René M., Hedge Fund Contagion and Liquidity Shocks (January 1, 2010). Journal of Finance, Vol. 55, No. 5, pp. 1789-1816, October 2010. Available at SSRN: https://ssrn.com/abstract=884202

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)

Christof W. Stahel

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

United States
+1.202.551.6623 (Phone)

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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