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Hedge Fund Contagion and Liquidity Shocks


  • Boyson is at Northeastern University, Stahel is at George Mason University and the FDIC, and Stulz is at The Ohio State University, NBER, and ECGI. We wish to thank Nick Bollen, Stephen Brown, William Greene, Cam Harvey, David Hsieh, Andrew Karolyi, Andy Lo, Marno Verbeek, an Associate Editor, two referees, and participants at seminars and conferences at the CREST-Banque de France conference on contagion, the ECB, the FDIC, Imperial College, Maastricht University, The Ohio State University, RSM Erasmus University, UCLA, the 2009 AFA annual meeting, the 2009 WFA annual meeting, Villanova University, and Wharton for useful comments. We are also grateful to Rose Liao and Jérôme Taillard for research assistance. We thank Lisa Martin at Hedge Fund Research for assistance regarding her firm's products.


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 asset and hedge fund 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.

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