Hedge Fund Return Predictability In The Presence Of Model Risk
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Hedge Fund Return Predictability In The Presence Of Model Risk
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Author : Christos Argyropoulos
language : en
Publisher:
Release Date : 2019
Hedge Fund Return Predictability In The Presence Of Model Risk written by Christos Argyropoulos and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Hedge funds implement elaborate investment strategies that include a variety of positions and assets. As a result, there is significant time variation in the set of risk factors and their respective loadings which in turn introduces severe model risk in any attempt to model and forecast hedge fund returns. In this study, we investigate the statistical and economic value of incorporating heteroscedasticity, non-normality, time-varying parameters, model selection risk and parameter estimation risk jointly in hedge fund return forecasting and fund of funds construction. Parameter estimation risk is dealt with a time-varying parameter structure, while model selection uncertainty is mitigated by model averaging or model selection. We adopt a dynamic model averaging approach along with the conventional Bayesian averaging technique. Our empirical results suggest that accounting for model risk can significantly improve the forecasting accuracy of hedge fund returns and, consequently, the performance of funds of hedge funds.
Hedge Fund Return Predictability In The Presence Of Model Uncertainty And Implications For Wealth Allocation
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Author : Ioannis D. Vrontos
language : en
Publisher:
Release Date : 2008
Hedge Fund Return Predictability In The Presence Of Model Uncertainty And Implications For Wealth Allocation written by Ioannis D. Vrontos and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
This paper studies hedge fund return predictability in a multivariate setting. Our research design and analysis is motivated by the empirical observations that a specific forecasting model that is going to perform well is not known ex-ante and that modelling time varying return covariances/correlations improves our ability to construct optimal hedge fund portfolios. We employ a multivariate GARCH specification to model time-varying covariances/correlations of hedge fund returns and we develop a stochastic search algorithm to compute posterior model probabilities for alternative predictive specifications. Our empirical analysis indicates that introducing dynamic covariance/correlation modeling improves the out-of-sample performance of optimal hedge fund portfolios. Moreover, introducing predictive factors provides incremental additional portfolio outperformance.
Hedge Fund Returns
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Author : Christian Alexander Wegener
language : en
Publisher: Logos Verlag Berlin GmbH
Release Date : 2011
Hedge Fund Returns written by Christian Alexander Wegener and has been published by Logos Verlag Berlin GmbH this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with Business & Economics categories.
The present work advances the research on hedge fund returns in three main areas. Firstly, their statistical properties are assessed in order to understand by what degree the returns of this alternative asset class are subject to non-normality, autocorrelation and heteroscedasticity. Secondly, state-of-the-art econometric approaches are used for the purpose of analyzing whether and to what extent monthly hedge fund returns are forecastable. Thirdly, an effort is made to identify and explain which economic risks affect the performance of the different hedge fund strategy styles in which way. The empirical results suggest that monthly hedge fund returns are forecastable by means of multivariate regression models which rely on economic predictors such as changes in interest rates or changes in business outlooks. Accounting for the fact that hedge fund returns are non-normally distributed, heteroscedastic and time-varying in their exposure to pervasive risk factors, the devised econometric models are found to deliver significant out-of-sample predictive power. The thesis at hand also documents that the interdependencies between the monthly changes of envisaged risk factors and the subsequent hedge fund returns remain remarkably stable throughout time. In essence, the performance of hedge funds appears to be sensitive to common business cycle movements. Altogether, the results are relevant to researchers in search of a description and application of contemporary return prediction methods as well as to investors in need of a better understanding of the drivers of hedge fund returns.
Predictability In Hedge Fund Returns
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Author : Noel Amenc
language : en
Publisher:
Release Date : 2004
Predictability In Hedge Fund Returns written by Noel Amenc and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004 with categories.
A significant amount of research has been devoted to the predictability of traditional asset classes, but little is known about the predictability of returns emanating from alternative vehicles, such as hedge funds. We attempt to fill this gap by documenting evidence of predictability in hedge fund returns. Using multifactor models for the return on nine hedge fund indexes, for which the factors were chosen to measure the many dimensions of financial risk, we found strong evidence of significant predictability in hedge fund returns. We also found that the benefits of tactical style allocation portfolios are potentially large. We obtained even more spectacular results for an equity-oriented portfolio that mixed traditional and alternative investment vehicles and for a debt-oriented portfolio that mixed traditional and alternative investment vehicles. These results do not seem to have been significantly affected by the presence of reasonably high transaction costs.
Essays On Hedge Fund Illiquidity Return Predictability And Time Varying Risk Exposure
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Author : Mathias Simon Kruttli
language : en
Publisher:
Release Date : 2015
Essays On Hedge Fund Illiquidity Return Predictability And Time Varying Risk Exposure written by Mathias Simon Kruttli and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with Bayesian statistical decision theory categories.
Hedge Fund Return Predictability To Combine Forecasts Or Combine Information
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Author : Ekaterini Panopoulou
language : en
Publisher:
Release Date : 2014
Hedge Fund Return Predictability To Combine Forecasts Or Combine Information written by Ekaterini Panopoulou and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
While the majority of the predictability literature has been devoted to the predictability of traditional asset classes, the literature on the predictability of hedge fund returns is quite scanty. We focus on assessing the out-of-sample predictability of hedge fund strategies by employing an extensive list of predictors. Aiming at reducing uncertainty risk associated with a single predictor model, we first engage into combining the individual forecasts. We consider various combining methods ranging from simple averaging schemes to more sophisticated ones, such as discounting forecast errors, cluster combining and principal components combining. Our second approach combines information of the predictors and applies kitchen sink, bootstrap aggregating (bagging), lasso, ridge and elastic net specifications. Our statistical and economic evaluation findings point to the superiority of simple combination methods. We also provide evidence on the use of hedge fund return forecasts for hedge fund risk measurement and portfolio allocation. Dynamically constructing portfolios based on the combination forecasts of hedge funds returns leads to considerably improved portfolio performance.
Three Essays On Return Predictability And Decentralized Investment Management
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Author : Dashan Huang
language : en
Publisher:
Release Date : 2013
Three Essays On Return Predictability And Decentralized Investment Management written by Dashan Huang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Electronic dissertations categories.
My research field is asset pricing with a focus on return predictability, innovation and market efficiency, and delegated investment management. In Chapter 1, "Maximum Return Predictability", I develop two theoretical upper bounds on the R2 of the regression of stock returns on predictive variables. Empirically, I found that the predictive R2s are significantly larger than the upper bounds, implying that existing asset pricing models are incapable of explaining the degree of return predictability. For example, the predictive R2 of the price dividend ratio for the U.S. market forecasting is 0.27% with monthly data. However, the theoretical upper bound is at most 0.07% with respect to CAPM, Fama-French three-factor model, CARA, habitat-formation model, long-run risk model, or rare disaster model. The finding of this paper suggests the development of new asset pricing models with new state variables that are highly correlated with stock returns. Recently, several papers found that the predictive power of almost all the existing macroeconomic variables exists only during economic recessions but does not exist over economic expansions. There perhaps have two reasons. First, existing predictors are individual economic variables and cannot capture the dynamics of the whole market. Second, the recognized predictive regression does not distinguish the varying ability of macro variables in forecasting the financial market. In Chapter 2, "Economic and Market Conditions: Two State Variables that Predict the Stock Market," Guofu Zhou and I identify two new predictors that capture the state of the economy and the state of the market condition, and found that the forecast of the market risk premium by the two predictors outperform a pooled forecast of dozens of existing predictors. Moreover, they forecast the stock market not only during down turns of the economy, but also during the up turns when other predictors fail. In decentralized investment management, there is always a friction between the principal and the manager. In Chapter 3, "The Servant of Two Masters: A Common Agency Explanation for Side-by-Side Management," I present a common agency model to study side-by-side (SBS) management in which a manager simultaneously manages two funds and separately contracts with the two different fund principals. The contracting is decentralized and includes two types of externalities: the manager's efforts are substitutable and the performance in one fund can generate a spillover effect on the other fund. The two principals can choose competition or free-riding. Under public contracting, competition is more likely to dominate free-riding. Under private contracting, however, free-riding becomes more important. In either case, SBS could generate better performance than standalone management.
Relative Value Hedge Funds
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Author : Lee Mick Swartz
language : en
Publisher:
Release Date : 2018
Relative Value Hedge Funds written by Lee Mick Swartz and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
This study has 4 contributions to the literature. First, the authors analyze the risk characteristics for 11 Relative Value hedge fund strategies. Second, the authors introduce 3 families of behavioral factors, the D family, the L family, and the R family. In contrast to previous hedge fund studies, these new factors assume investors use historical and behavioral data such as average drawdown, run up, and liquidity from each hedge fund category to assess the risk. Third, additional macroeconomic variables, such as the CRB, Copper, and Oil are found to be statistically significant in some strategies. This economic and historical information, when included with asset pricing models, is more powerful in explaining hedge fund returns than previous models. Fourth, unlike the previous literature, these generated models are corrected for time-series assumptions violations and heteroskedasticity. To more fully understand the timing of risks and returns associated with investing in relative value hedge funds, pension funds, and other investors should incorporate more economic factors and behavioral factors.
The Fundamental Principles Of Financial Regulation
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Author : Charles Albert Eric Goodhart
language : en
Publisher: Geneva Reports on the World Ec
Release Date : 2009
The Fundamental Principles Of Financial Regulation written by Charles Albert Eric Goodhart and has been published by Geneva Reports on the World Ec this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with Business & Economics categories.
Analytical background -- Nature of systemic risk -- Who should be regulated (by whom) -- Counter-cyclical regulation -- Regulation of liquidity and maturity mismatches -- Other regulatory issues -- The structure of regulation -- Conclusions -- Appendix : the boundary problem in financial regulation -- Discussion and roundtables.
Empirical Asset Pricing
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Author : Wayne Ferson
language : en
Publisher: MIT Press
Release Date : 2019-03-12
Empirical Asset Pricing written by Wayne Ferson and has been published by MIT Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-03-12 with Business & Economics categories.
An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.