Asymmetric dynamics in the correlations of hedge fund strategy indices: what lessons about financial contagion ?

Franck Martin and Mai Lan Nguyen ()
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Mai Lan Nguyen: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we study the eight style-categories of hedge funds (Event Driven, Global Macro, Relative Value Arbitrage, Equity Hedge, Absolute Return, Distressed Restructuring, Equity Market Neutral and Merger Arbitrage) from January 2005 to June 2012 in order to examine if the hedge fund returns and correlations are affected by the crisis. This paper improves the AG-DCC-GARCH model, developed by Cappiello et al. (2006), by taking into account structural breaks during turbulent periods. The adjustment of variable Dummy in correlation construction has been verified significant and adequate in our work. We find a sharp increase in the correlations of returns during several turbulent periods, while the eight style-categories of hedge funds are normally weakly correlated with the general evolution of financial markets and also weakly correlated between themselves. This is undoubtedly a significant and untapped financial contagion dimension.

Keywords: Hedge funds; contagion; structural breaks; AG-DCC-GARCH; financial crisis (search for similar items in EconPapers)
Date: 2015-05-20
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Published in 22d International Conference Forecasting Financial Markets, www.aea-eu.net; TAC Economics, May 2015, Rennes, France

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Journal Article: Asymmetric dynamics in the correlations of hedge fund strategy indices: what lessons about financial contagion ? (2015)
Working Paper: Asymmetric dynamics in the correlations of hedge fund strategy indices: what lessons about financial contagion ? (2015)
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