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Discussed by Jingjing Xia

RISK SPILLOVER AMONG HEDGE FUNDS: THE ROLE OF REDEMPTIONS AND FUND FAILURES – Klaus and Rzepkowski (2009). Discussed by Jingjing Xia. Brief Summary. Analyze mortality patterns of hedge funds and identify risk spillover Use individual fund data from TASS (1994 - 2008)

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Discussed by Jingjing Xia

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  1. RISK SPILLOVER AMONG HEDGE FUNDS: THE ROLE OF REDEMPTIONS AND FUND FAILURES – Klaus and Rzepkowski (2009) Discussed by Jingjing Xia

  2. Brief Summary Analyze mortality patterns of hedge funds and identify risk spillover Use individual fund data from TASS (1994 - 2008) Two channels: “bank” run; counterparty risk Apply binary logit model and semiparametric Cox (robustness check) 1) There is significant risk spillover between funds on failure probability; 2) Funds within the same investment style affected by both channels; 3) Funds across different investment style affected by redemption only; 4) Diversification reduces failure probability significantly. Contribution: few literatures; individual fund data

  3. C1: Contagion? The model estimate correlation between failures of different hedge funds not unobserved factors that cause failure of one fund conditional the failure of others

  4. C2: Data? Possible sampling bias: Before filter - 7000 Alive and 5000 Graveyard; After filter – 2600 Alive and 2600 Graveyard. The total AUM of sample hedge funds is about 0.5 trillion USD (1/4) Is the sample representative? The time period of data goes from 1994 to 2008. Maybe better includes data after 2008 for contagion analysis (not authors’ fault)

  5. C3: Model? Latent failure probability ? Endogeneity issue? Yearly dummy is used to capture the impact of common shocks? FIXED EFFECT IS FOR UNOBSERVABLE FACTORS! Redemption variable: better be dummy than ratio

  6. C4: Diversification How diversification is defined? Geographic diversification and assets diversification. BUT No idea about investment values! 1% in India + 99% in US = diversified! May introduce other effects: geographic diversification – emerging market focus funds (may diversify across emerging countries); asset diversification – fixed income focus fund (may diversify across maturities and even countries)

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