Extremal connectedness of hedge funds

Mhalla, Linda; Hambuckers, Julien; Lambert, Marie

doi:10.1002/jae.2900

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Extremal connectedness of hedge funds

Mhalla, Linda; Hambuckers, Julien; Lambert, Marie

2022 • In Journal of Applied Econometrics, 37 (5), p. 988-1009

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https://hdl.handle.net/2268/265911

DOI
10.1002/jae.2900

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Keywords :

extreme value theory; systemic measure; tail dependence measure

Abstract :

[en] We propose a dynamic measure of extremal connectedness tailored to the short reporting period and unbalanced nature of hedge funds data. Using multivariate extreme value regression techniques, we estimate this measure conditional on factors reflecting the economic uncertainty and the state of the financial markets, and derive risk indicators reflecting the likelihood of extreme spillovers. Empirically, we study the dynamics of tail dependencies between hedge funds grouped per investment strategies, as well as with the banking sector. We show that during crisis periods, some pairs of strategies display an increase in their extremal connectedness, revealing a higher likelihood of simultaneous extreme losses. We also find a sizable tail dependence between hedge funds and banks, indicating that banks are more likely to suffer extreme losses when the hedge fund sector does. Our results highlight that a proactive regulatory framework should account for the dynamic nature of the tail dependence and its link with financial stress.

Disciplines :

Quantitative methods in economics & management

Author, co-author :

Mhalla, Linda; HEC Lausanne, University of Lausanne

Hambuckers, Julien ; Université de Liège - ULiège > HEC Liège : UER > UER Finance et Droit : Finance de Marché

Lambert, Marie ; Université de Liège - ULiège > HEC Liège : UER > UER Finance et Droit : Analyse financière et finance d'entr.

Language :

English

Title :

Extremal connectedness of hedge funds

Publication date :

2022

Journal title :

Journal of Applied Econometrics

ISSN :

0883-7252

eISSN :

1099-1255

Publisher :

John Wiley & Sons, Hoboken, United States - New Jersey

Volume :

Issue :

Pages :

988-1009

Peer reviewed :

Peer Reviewed verified by ORBi

Additional URL :

https://github.com/lindamhalla/Extremal-connectedness-of-hedge-funds

Name of the research project :

REFEX (Regression models for financial extremes)

Funders :

SNSF - Swiss National Science Foundation [CH]
BNB - Banque Nationale de Belgique [BE]

Available on ORBi :

since 10 December 2021

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