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L-performance with an application to hedge funds

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Author Info

  • Darolles, Serge
  • Gourieroux, Christian
  • Jasiak, Joann

Abstract

This paper introduces a new parametric fund performance measure, called the L-performance. The L-performance is an alternative to the Sharpe performance, which is commonly used in practice despite its inability to account for skewness and heavy tails of unconditional return distributions. The L-performance improves upon the Sharpe measure in this respect. Technically, it resembles the Sharpe measure in that it is defined as a ratio of the first- and second-order moments, which are the trimmed L-moments instead of the conventional (power) moments. The trimming parameters allow for focusing the L-performance on specific risk levels of interest, according to financial risk criteria. For illustration, a set of L-performances is computed for a variety of hedge funds. The empirical study shows the use of L-performance for fund ranking and return smoothing (manipulation) control.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (September)
Pages: 671-685

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Handle: RePEc:eee:empfin:v:16:y:2009:i:4:p:671-685

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Hedge fund Sharpe performance L-moment Distortion risk Measure Ranking Bias ratio Manipulation;

References

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  1. Vytaras Brazauskas & Bruce L. Jones & Ricardas Zitikis, 2007. "Robustification and performance evaluation of empirical risk measures and other vector-valued estimators," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(2), pages 175-199.
  2. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
  3. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521608275.
  4. Norvaisa, Rimas, 1993. "The central limit theorem for empirical and quantile processes in some Banach spaces," Stochastic Processes and their Applications, Elsevier, vol. 46(1), pages 1-27, May.
  5. Haley, M. Ryan & McGee, M. Kevin, 2006. "Tilting safety first and the Sharpe portfolio," Finance Research Letters, Elsevier, vol. 3(3), pages 173-180, September.
  6. Bruce L. Jones & Ricardas Zitikis, 2005. "Testing for the order of risk measures: an application of L-statistics in actuarial science," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(2), pages 193-211.
  7. Gourieroux, C. & Jasiak, J., 2008. "Dynamic quantile models," Journal of Econometrics, Elsevier, vol. 147(1), pages 198-205, November.
  8. Karvanen, Juha, 2006. "Estimation of quantile mixtures via L-moments and trimmed L-moments," Computational Statistics & Data Analysis, Elsevier, vol. 51(2), pages 947-959, November.
  9. Bawa, Vijay S., 1978. "Safety-First, Stochastic Dominance, and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(02), pages 255-271, June.
  10. Elamir, Elsayed A. H. & Seheult, Allan H., 2003. "Trimmed L-moments," Computational Statistics & Data Analysis, Elsevier, vol. 43(3), pages 299-314, July.
  11. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
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Cited by:
  1. repec:ner:dauphi:urn:hdl:123456789/9108 is not listed on IDEAS
  2. Darolles, Serge & Gourieroux, Christian, 2010. "Conditionally fitted Sharpe performance with an application to hedge fund rating," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 578-593, March.

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