kaal:claim:2748096-030

The theoretical link between hedge funds and systemic risk rests on limits to arbitrage: speculators' capital is finite, their capacity to supply liquidity depends on funding, and that funding can dry up abruptly in periods of financial distress, producing liquidity spirals amplified by rising return correlations, higher volatility, and flight to quality.

These models rely on the concept that speculators' capital is not unlimited, but rather that their ability to provide liquidity is dependent on funding, and that this funding can suddenly dry up in periods of financial distress and lead to liquidity spirals.

Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016), POST-CRISIS EVIDENCE ON THE SYSTEMIC RISK OF HEDGE FUNDS, p. 12
https://ssrn.com/abstract=2748096 · source PDF

Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096

• periods of financial distress
• speculators dependent on external funding

mechanismsupport: argueddefi

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