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A New Tool for Detecting Intraday Periodicities with Application to High Frequency Exchange Rates

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Author Info

  • Chris Brooks

    ()
    (ICMA Centre, University of Reading)

  • Melvin J. Hinich

    (University of Texas at Austin, USA)

Abstract

In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig’s (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 – April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-04.

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Length: 31 pages
Date of creation: Jul 2001
Date of revision:
Publication status: Published in Journal of the Royal Statistical Society, Series C 55:2, 2006, 241-259
Handle: RePEc:rdg:icmadp:icma-dp2001-04

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Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
Phone: +44 (0) 118 378 8226
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Web page: http://www.henley.reading.ac.uk/
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Related research

Keywords: Spectral Analysis; Periodicities; Seasonality; Forecasting Exchange Rates; Trading Rules;

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References

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  1. Yadav, Pradeep K. & Pope, Peter F., 1992. "Intraweek and intraday seasonalities in stock market risk premia: Cash and futures," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 233-270, February.
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  11. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
  12. Jeffrey Jaffe & R. Westerfield, . "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 3-85, Wharton School Rodney L. White Center for Financial Research.
  13. Upson, Roger B., 1972. "Random Walk and Forward Exchange Rates: A Spectral Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1897-1905, September.
  14. Chan, K C & Christie, William G & Schultz, Paul H, 1995. "Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities," The Journal of Business, University of Chicago Press, vol. 68(1), pages 35-60, January.
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