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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Systemic Risk and Hedge Funds

Systemic Risk and Hedge Funds

Chapter:
(p.235) 6 Systemic Risk and Hedge Funds
Source:
The Risks of Financial Institutions
Author(s):

Nicholas Chan

Mila Getmansky

Shane M. Haas

Andrew W. Lo

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226092980.003.0007

This chapter reports that inferences about risk can be acutely sensitive to the sample period used to produce risk measures. It also discusses the increasing role of hedge funds. The dynamics of hedge funds are quite different to those of more traditional investments, and the potential impact on systemic risk is apparent. Illiquidity and smoothed returns may be significant properties for hedge fund returns. Serial correlation may serve as a proxy for a fund's liquidity exposure. The banking sector has significant exposure to certain hedge fund indexes, implying the presence of some common factors between hedge funds and banks, and raising the possibility that dislocation among the former can impact the latter. It is shown that the average liquidation probability for funds in 2004 is over 11 percent, which is higher than the historical unconditional attrition rate of 8.8 percent. The chapter explains how the banking sector is exposed to hedge fund risks.

Keywords:   systemic risk, risk measures, hedge funds, serial correlation, liquidity, banking, illiquidity, liquidation probability

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