Tracking market and non-traditional sources of risks in procyclical and countercyclical hedge fund strategies under extreme scenarios:a nonlinear VAR approach

The subprime crisis was quite damaging for hedge funds.Using the local projection method(Jordà2004,2005,2009),we forecast the dynamic responses of the betas of hedge fund strategies to macroeconomic and financial shocks—especially volatility and illiquidity shocks—over the subprime crisis in order to investigate their market timing activities.In a robustness check,using TVAR(Balke 2000),we simulate the reaction of hedge fund strategies’betas in extreme scenarios allowing moderate and strong adverse shocks.Our results show that the behavior of hedge fund strategies regarding the monitoring of systematic risk is highly nonlinear in extreme scenarios—especially during the subprime crisis.We find that countercyclical strategies have an investment technology which differs from procyclical ones.During crises,the former seek to capture non-traditional risk premia by deliberately increasing their systematic risk while the later focus more on minimizing risk.Our results suggest that the hedge fund strategies’betas respond more to illiquidity uncertainty than to illiquidity risk during crises.We find that illiquidity and VIX shocks are the major drivers of systemic risk in the hedge fund industry.

Impacts of CME Changing Mechanism for Allowing Negative Oil Prices on Prices and Trading Activities in the Crude Oil Futures Market

This study investigates and compares the effects of the Coronavirus disease 2019(COVID-19)pandemic,the Chicago mercantile exchange(CME)'s negative price suggestion on prices and trading activities in the crude oil futures market to discuss the cause of negative crude oil futures prices.Through event studies,the empirical results show that the COVID-19 pandemic no longer impacts crude oil futures prices in April,2020 after controlled market risk,while the CME's negative prices suggestion can explain the crude oil futures price changes around and even after April 8,2020 to some degree.Moreover,this study uncovers anomalies in prices and trading activities by analyzing returns,trading volume,open interest,and illiquidity measures using vector autoregressive(VAR)models.The results imply that CME's allowing negative prices strengthens the price impact on trading volume and makes illiquidity risk matter.This study's results coincide with the following lawsuit evidence of market manipulation.