Title: Tail risk and style dependence in the fund industry: A multivariate extreme value approach
Authors: Julien Hambuckers - University of Liege - HEC Liège (Belgium) [presenting]
Linda Mhalla - HEC Montreal (Canada)
Marie Lambert - HEC Liege (Belgium)
Abstract: With the recent financial crisis and the increasing interconnectedness of financial institutions, regulators have started to pay more attention to the concept of systemic risk. Whereas most of the systemic risk literature focuses on the banking industry, there has also been a growing interest in the contribution of unregulated funds, e.g. hedge funds. We propose to look at systemic risk in a universe of funds by the prism of conditional extremal tail dependence across the different investment strategies of the funds. Relying on univariate and multivariate extreme value theory, we first model the dynamics of style-specific extreme fund losses with a non-stationary generalized Pareto distribution depending on the return characteristics and then study the dynamics of the tail dependencies between fund styles conditional on measures of the economic uncertainty and the stock market performance. We show that economic uncertainty and market stress influence the links between strategy-specific extreme losses.