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Heterogeneity and clustering of defaults
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Karlis, A. K., Galanis, G., Terovitis, S. and Turner, Matthew S. (2021) Heterogeneity and clustering of defaults. Quantitative Finance, 21 (9). pp. 1533-1549. doi:10.1080/14697688.2021.1882686 ISSN 1469-7688.
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Official URL: http://dx.doi.org/10.1080/14697688.2021.1882686
Abstract
This paper studies how the degree of heterogeneity among hedge funds' demand orders for a risky asset affects the possibility of their defaults being clustered. We find that fire-sales caused by margin calls is a necessary, yet not a sufficient condition for defaults to be clustered. We show that when the degree of heterogeneity is sufficiently high, poorly performing HFs are able to obtain a higher than usual market share, which leads to an improvement of their performance. Consequently, their survival time is prolonged, increasing the probability of them remaining in operation until the downturn of the next leverage cycle. This leads to an increase in the probability of poorly and high-performing hedge funds to default in sync at a later time, and thus also in the probability of collective defaults. Our analytical results establish a connection between the nontrivial aggregate statistics and the presence of infinite memory in the process governing the hedge funds' defaults.
Item Type: | Journal Article | ||||||
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Subjects: | H Social Sciences > HG Finance Q Science > QA Mathematics |
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Physics | ||||||
Library of Congress Subject Headings (LCSH): | Hedge funds -- Mathematical models, Mathematical statistics, Contagious distributions | ||||||
Journal or Publication Title: | Quantitative Finance | ||||||
Publisher: | Routledge | ||||||
ISSN: | 1469-7688 | ||||||
Official Date: | 30 March 2021 | ||||||
Dates: |
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Volume: | 21 | ||||||
Number: | 9 | ||||||
Page Range: | pp. 1533-1549 | ||||||
DOI: | 10.1080/14697688.2021.1882686 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||
Date of first compliant deposit: | 10 August 2021 | ||||||
Date of first compliant Open Access: | 11 August 2021 |
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