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Hedge fund pricing and model uncertainty

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  • Vrontos, Spyridon D.
  • Vrontos, Ioannis D.
  • Giamouridis, Daniel

Abstract

This article uses Bayesian model averaging to study model uncertainty in hedge fund pricing. We show how to incorporate heteroscedasticity, thus, we develop a framework that jointly accounts for model uncertainty and heteroscedasticity. Relevant risk factors are identified and compared with those selected through standard model selection techniques. The analysis reveals that a model selection strategy that accounts for model uncertainty in hedge fund pricing regressions can be superior in estimation/inference. We explore potential impacts of our approach by analysing individual funds and show that they can be economically important.

Suggested Citation

  • Vrontos, Spyridon D. & Vrontos, Ioannis D. & Giamouridis, Daniel, 2008. "Hedge fund pricing and model uncertainty," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 741-753, May.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:741-753
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