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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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    References listed on IDEAS

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    1. Randall Jackson & Alan Murray, 2004. "Alternative Input-Output Matrix Updating Formulations," Economic Systems Research, Taylor & Francis Journals, vol. 16(2), pages 135-148.
    2. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
    3. Karagiorgis, Ariston & Drakos, Konstantinos, 2022. "The Skewness-Kurtosis plane for non-Gaussian systems: The case of hedge fund returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    4. George P Gao & Pengjie Gao & Zhaogang Song, 2018. "Do Hedge Funds Exploit Rare Disaster Concerns?," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2650-2692.
    5. Jafry, Yusuf & Schuermann, Til, 2004. "Measurement, estimation and comparison of credit migration matrices," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2603-2639, November.
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    More about this item

    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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