Modeling hedge fund exposure to risk factors
AbstractThis paper examines the adjustment dynamics of hedge fund returns and studies their exposure to risk factors in a nonlinear framework for several types of strategies over the last two decades. Nonlinearity is justified by distortions due to the use of short selling, leverage, derivatives and illiquid assets for hedge fund strategies. Among nonlinear models, switching regime (STR) models are applied to reproduce the dynamics of hedge fund returns. This nonlinear multivariate modeling has the advantage of capturing the time-varying exposure of hedge fund strategies to risk factors, and of specifying the asymmetric relationship between hedge fund returns and risk. The findings are interesting and provide several contributions to the hedge fund literature. First, we show that the dynamics of hedge fund returns exhibit significant asymmetry and nonlinearity, indicating that they evolve and vary asymmetrically in accordance with stages in financial cycles. Second, hedge fund exposure to risk factors also varies over time, depending on the strategy and the regime. Finally, our modeling captures the most important changes in hedge fund exposure to risk factors induced by the recent global financial crisis (2008–2009).
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 4 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/30411
Hedge funds; Style analysis; Nonlinearity; Switching Transition Regression models;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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