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Dynamic Risk Exposure in Hedge Funds

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Author Info
Monica Billio () (Department of Economics, University Of Venice Cà Foscari)
Mila Getmansky (Isenberg School of Management, University of Massachusetts)
Loriana Pelizzon (Department of Economics, University Of Venice Cà Foscari)

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Abstract

We measure dynamic risk exposure of hedge funds to various risk factors during different market volatility conditions using the regime-switching beta model. We find that in the high-volatility regime (when the market is rolling-down) most of the strategies are negatively and significantly exposed to the Large-Small and Credit Spread risk factors. This suggests that liquidity risk and credit risk are potentially common factors for different hedge fund strategies in the down-state of the market, when volatility is high and returns are very low. We further explore the possibility that all hedge fund strategies exhibit idiosyncratic risk in a high volatility regime and find that the joint probability jumps from approximately 0% to almost 100% only during the Long-Term Capital Management (LTCM) crisis. Out-of-sample forecasting tests confirm the economic importance of accounting for the presence of market volatility regimes in determining hedge funds risk exposure.

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Publisher Info
Paper provided by University of Venice "Ca' Foscari", Department of Economics in its series Working Papers with number 2007_17.

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Length: 67
Date of creation: 2007
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Handle: RePEc:ven:wpaper:2007_17

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Related research
Keywords: Hedge Funds Risk Management Regime-Switching Models Liquidity

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G29 - Financial Economics - - Financial Institutions and Services - - - Other
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Brealey, Richard A & Kaplanis, Evi, 2001. "Hedge Funds and Financial Stability: An Analysis of Their Factor Exposures," International Finance, Blackwell Publishing, vol. 4(2), pages 161-87, Summer. [Downloadable!] (restricted)
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  15. Bali, Turan G. & Gokcan, Suleyman & Liang, Bing, 2007. "Value at risk and the cross-section of hedge fund returns," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1135-1166, April. [Downloadable!] (restricted)
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  17. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Loriana Pelizzon & Monica Billio & Mila Getmansky, 2008. "Non-Parametric Analysis of Hedge Fund Returns: New Insights from High Frequency Data," Working Papers 2008_11, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  2. Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2008. "Hedge Fund Contagion and Liquidity," NBER Working Papers 14068, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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