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Hedge Fund Return Dependence: Model Misspecification or Liquidity Spirals?

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  • Sias, Richard
  • Turtle, Harry J.
  • Zykaj, Blerina

Abstract

We test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered (for economic fundamentals) hedge fund index returns and the links between volatility, liquidity shocks, and hedge fund return clustering. Evidence supports the model misspecification hypothesis: i) hedge fund filtered return clustering is symmetric, ii) filtered Short Bias fund returns exhibit negative dependence with filtered returns for other hedge fund types, iii) negative liquidity shocks are associated with clustering in both tails and market volatility subsumes the role of negative liquidity shocks, and iv) these same patterns appear in size-sorted equity portfolios.

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  • Sias, Richard & Turtle, Harry J. & Zykaj, Blerina, 2017. "Hedge Fund Return Dependence: Model Misspecification or Liquidity Spirals?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2157-2181, October.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:05:p:2157-2181_00
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    Cited by:

    1. Agnes Cheng, C.S. & Xie, Jing & Zhong, Yuxiang, 2023. "Common institutional blockholders and tail risk," Journal of Banking & Finance, Elsevier, vol. 148(C).

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