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Risk Measures for Autocorrelated Hedge Fund Returns

Author

Listed:
  • Antonio Di Cesare
  • Philip A. Stork
  • Casper G. de Vries

Abstract

Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. We distinguish between normally and fat-tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. An empirical analysis reveals that unadjusted risk measures can considerably underestimate the true extent of individual and systemic risks for hedge funds.

Suggested Citation

  • Antonio Di Cesare & Philip A. Stork & Casper G. de Vries, 2015. "Risk Measures for Autocorrelated Hedge Fund Returns," Journal of Financial Econometrics, Oxford University Press, vol. 13(4), pages 868-895.
    • Handle: RePEc:oup:jfinec:v:13:y:2015:i:4:p:868-895.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbu023
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    Cited by:

    1. Kerstin Lamert & Benjamin R. Auer & Ralf Wunderlich, 2023. "Discretization of continuous-time arbitrage strategies in financial markets with fractional Brownian motion," Papers 2311.15635, arXiv.org.

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    More about this item

    Keywords

    hedge funds; Pareto distribution; serial correlation; systemic risk; VaR.;
    All these keywords.

    JEL classification:

    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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