Asymmetric dynamics in the correlations of hedge fund strategy indices: what lessons about financial contagion ?

International audienceIn this paper, we study the eight style-categories of hedge funds (Event Driven, Global Macro, Relative Value Arbitrage, Equity Hedge, Absolute Return, Distressed Restructuring, Equity Market Neutral and Merger Arbitrage) from January 2005 to June 2012 in order to examine if the hedge fund returns and correlations are affected by the crisis. This paper improves the AG-DCC-GARCH model, developed by Cappiello et al. (2006), by taking into account structural breaks during turbulent periods. The adjustment of variable Dummy in correlation construction has been verified significant and adequate in our work. We find a sharp increase in the correlations of returns during several turbulent periods, while the eight style-categories of hedge funds are normally weakly correlated with the general evolution of financial markets and also weakly correlated between themselves. This is undoubtedly a significant and untapped financial contagion dimension