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Assessing the impact of heteroskedasticity for evaluating hedge fund performance

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  • Marshall, Andrew
  • Tang, Leilei
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    Abstract

    Recently there have been a number of differing findings in the empirical evidence on fund performance. In this paper we suggest this difference could be explained by the treatment of the regression assumptions. The crucial question in this paper for investors is whether the presence of heteroskedasticity causes size distortion in testing fund performance. Our simulation findings indicate that heteroskedasticity can have significant impact on the evaluation of fund performance. We also apply a wild bootstrap approach to test a sample of hedge fund data. Our results suggest that one of the possible reasons for superior performance of hedge funds is that the bootstrap data generating process cannot fully account for heteroskedasticity. Overall, our results are consistent with the view that hedge funds are a heteroskedastic group and wild bootstrap is well suited to the performance measurement of hedge funds.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 20 (2011)
    Issue (Month): 1 (January)
    Pages: 12-19

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    Handle: RePEc:eee:finana:v:20:y:2011:i:1:p:12-19

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Alpha Error rejection probability Hedge fund performance Heteroskedasticity Wild bootstrap approach;

    References

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