TY  - JOUR
AU  - Boyson,Nicole M.
AU  - Stahel,Christof W.
AU  - Stulz,Rene M.
TI  - Hedge Fund Contagion and Liquidity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14068
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14068
L1  - http://www.nber.org/papers/w14068.pdf
N1  - Author contact info:
Nicole Boyson
Northeastern University
College of Business Administration
413C Hayden Hall
Boston, MA 02115-5000
E-Mail: n.boyson@neu.edu

Christof Stahel
George Mason University
Department of Finance
4400 University Drive, MSN 5F5
Fairfax, VA 22030
E-Mail: cstahel@gmu.edu

Rene M. Stulz
The Ohio State University
Fisher College of Business
806A Fisher Hall
Columbus, OH 43210-1144
Tel: 614/292-1970
Fax: 614/292-2359
E-Mail: stulz_1@cob.osu.edu
AB  - Using hedge fund indices representing eight different styles, we find strong evidence of contagion within the hedge fund sector: controlling for a number of risk factors, the average probability that a hedge fund style index has extreme poor performance (lower 10% tail) increases from 2% to 21% as the number of other hedge fund style indices with extreme poor performance increases from zero to seven. We investigate how changes in funding and asset liquidity intensify this contagion, and find that the likelihood of contagion is high when prime brokerage firms have poor performance (which would be expected to affect hedge fund funding liquidity adversely) and when stock market liquidity (a proxy for asset liquidity) is low. Finally, we examine whether extreme poor performance in the stock, bond, and currency markets is more likely when contagion in the hedge fund sector is high. We find no evidence that contagion in the hedge fund sector is associated with extreme poor performance in the stock and bond markets, but find significant evidence that performance in the currency market is worse when hedge fund contagion is high, consistent with the effects of an unwinding of carry trades.
ER  -