Macroeconomic shocks, forward-looking dynamics, and the behavior of hedge funds
François-Éric Racicot () and
Journal of Banking & Finance, 2016, vol. 62, issue C, 41-61
We investigate how hedge funds’ strategies react, as a group, to macroeconomic risk and uncertainty. Adopting the methodology of Beaudry et al. (2001), we track the behavior of the cross-sectional dispersions of hedge fund strategies’ returns, market betas and alphas over the business cycle. The pattern of strategies’ betas supports Beaudry et al.’s conjecture: hedge funds reduce their risk-taking (betas) during times of macroeconomic uncertainty, which makes their strategies more homogeneous and thus contributes to increased systemic risk in the financial system. However, the cyclical behavior of the cross-sectional dispersions of strategies’ returns and strategies’ alphas is not in line with Beaudry et al.’s conjecture. These dispersions tend to increase during episodes of rising macroeconomic uncertainty, which suggests the prevalence of the Black’s (1976) leverage effect during financial turmoil and the fact that the exposure of hedge fund strategies to risk factors is quite different from each other. Finally, although remaining important, procyclicality seems to have declined through time in the hedge fund industry, which suggests that a learning process is at play.
Keywords: Hedge fund; Shadow banks; Systemic risk; Macroeconomic shocks; Kalman filter; EGARCH; GMM (search for similar items in EconPapers)
JEL-codes: C13 C58 G11 G23 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:62:y:2016:i:c:p:41-61
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().