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Phase-Locking and Switching Volatility in Hedge Funds

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Author Info

  • Monica Billio

    ()
    (Department of Economics, University Of Venice Ca’ Foscari)

  • Mila Getmansky

    (msherman@som.umass.edu)

  • Loriana Pelizzon

    (pelizzon@unive.it)

Abstract

This article aims to investigate the phase-locking and switching volatility in the idiosyncratic risk factor of hedge funds using switching regime beta models. This approach allows the analysis of hedge fund tail event behavior and in particular the changes in hedge fund exposure to various risk factors potentially related to liquidity risk, conditional on different states of the market. We and that in a normal state of the market, the exposure to risk factors could be very low but as soon as the market risk factor captured by the S&P500 moves to a down-market state characterized by negative returns and high volatility, the exposure of hedge fund indexes to the S&P500 and especially to other risk factors changes signi?cantly presenting evidence of phase-locking. We further extend the regime switching model to allow for non-linearity in residuals and show that switching regime models are able to capture and forecast the evolution of the idiosyncratic risk factor in terms of changes from a low volatility regime to a distressed state that are not directly related to market risk factors.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2006/WP_DSE_billio_getmansky_pelizzon_54_06.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2006_54.

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Length: 66
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_54

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Related research

Keywords: Hedge Funds; Risk Management; Regime-Switching Models; Liquidity;

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References

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  1. Acharya, Viral V & Pedersen, Lasse Heje, 2004. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 4718, C.E.P.R. Discussion Papers.
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  13. Billio, Monica & Pelizzon, Loriana, 2000. "Value-at-Risk: a multivariate switching regime approach," Journal of Empirical Finance, Elsevier, vol. 7(5), pages 531-554, December.
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  16. Ferson, Wayne E & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas," Journal of Finance, American Finance Association, vol. 42(2), pages 201-20, June.
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Cited by:
  1. Szabolcs Blazsek & Anna Downarowicz, 2008. "Regime switching models of hedge fund returns," Faculty Working Papers 12/08, School of Economics and Business Administration, University of Navarra.

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