A New Tool for Detecting Intraday Periodicities with Application to High Frequency Exchange Rates
In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig’s (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 – April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.
|Date of creation:||Jul 2001|
|Date of revision:|
|Publication status:||Published in Journal of the Royal Statistical Society, Series C 55:2, 2006, 241-259|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC
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.:
- Steven N. Durlauf, 1992.
"Spectral Based Testing of the Martingale Hypothesis,"
NBER Technical Working Papers
0090, National Bureau of Economic Research, Inc.
- Durlauf, Steven N., 1991. "Spectral based testing of the martingale hypothesis," Journal of Econometrics, Elsevier, vol. 50(3), pages 355-376, December.
- French, Kenneth R., 1980. "Stock returns and the weekend effect," Journal of Financial Economics, Elsevier, vol. 8(1), pages 55-69, March.
- Chan, K C & Christie, William G & Schultz, Paul H, 1995. "Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities," The Journal of Business, University of Chicago Press, vol. 68(1), pages 35-60, January.
- Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
- Yadav, Pradeep K. & Pope, Peter F., 1992. "Intraweek and intraday seasonalities in stock market risk premia: Cash and futures," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 233-270, February.
- Jeffrey Jaffe & R. Westerfield, . "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 03-85, Wharton School Rodney L. White Center for Financial Research.
- Hilliard, Jimmy E, 1979. "The Relationship between Equity Indices on World Exchanges," Journal of Finance, American Finance Association, vol. 34(1), pages 103-14, March.
- Jeffrey Jaffe & R. Westerfield, . "The Week-End Effect in Common Stock Returns: The International Evidence," Rodney L. White Center for Financial Research Working Papers 3-85, Wharton School Rodney L. White Center for Financial Research.
- Upson, Roger B., 1972. "Random Walk and Forward Exchange Rates: A Spectral Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1897-1905, September.
- Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
- Fong, Wai Mun & Ouliaris, Sam, 1995. "Spectral Tests of the Martingale Hypothesis for Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(3), pages 255-71, July-Sept.
- Torben G. Andersen & Tim Bollerslev, 1998. "Deutsche Mark-Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies," Journal of Finance, American Finance Association, vol. 53(1), pages 219-265, 02.
- Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-33, October.
- Keim, Donald B & Stambaugh, Robert F, 1984. " A Further Investigation of the Weekend Effect in Stock Returns," Journal of Finance, American Finance Association, vol. 39(3), pages 819-35, July.
- Jaffe, Jeffrey F & Westerfield, Randolph, 1985. " The Week-End Effect in Common Stock Returns: The International Evidence," Journal of Finance, American Finance Association, vol. 40(2), pages 433-54, June.
When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2001-04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ed Quick)
If references are entirely missing, you can add them using this form.