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A stochastic analysis of hedge funds’ higher moments

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  • Karagiorgis, Ariston
  • Drakos, Konstantinos

Abstract

Utilizing hedge fund data, we investigate the mobility properties of higher moments both individually and jointly. Using a Markov chain model, we estimate, for the first time, transition matrices for the sector and by investment strategy, describing the probabilistic structure of Skewness, Kurtosis and Joint transitions. We further apply various indices to provide the anatomy of the dynamics. Additionally, we estimate three Probit models as a validation tool. We find a near perfect mobility toward Nonnormality across the investment strategies and the sector as a whole, for both higher moments and their joint movement. Only a limited number of investment strategies are capable of maintaining Normality for consecutive periods in the joint framework, while mobility indices confirm the findings of the transition matrices.

Suggested Citation

  • Karagiorgis, Ariston & Drakos, Konstantinos, 2023. "A stochastic analysis of hedge funds’ higher moments," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001393
    DOI: 10.1016/j.ribaf.2023.102013
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    Keywords

    Hedge funds; Higher moments; Kurtosis; Markov chain; Skewness;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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