Sovereign and Hedge Fund Systemic Risks

Abstract

To better explain the connection between hedge funds and sovereign risk in the Eurozone and to shed light on hedge fund dynamics relative to the surge in sovereign spreads, the authors introduce novel systemic risk measures for (1) Eurozone Core countries (France and Germany), (2) GIIPS (Greece, Ireland, Italy, Portugal, and Spain), and (3) the hedge fund industry. Using data on sovereign credit default swaps for France, Germany, Greece, Ireland, Italy, Portugal, Spain, and hedge fund indexes over the period from January 2008 to August 2013, the authors’ results provide new evidence about the connection between hedge funds and sovereign risk in the Eurozone. They find that the hedge fund sector contributed significantly to the rise of systemic risk for GIIPS and Core countries during the Greek crisis of 2010 and the Eurozone crisis of 2011.

TOPICS: Real assets/alternative investments/private equity, developed, risk management, financial crises and financial market history