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Regime switching models of hedge fund returns

Author

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  • Szabolcs Blazsek

    (Department of Business, Universidad de Navarra)

  • Anna Downarowicz

    (Department of Finance, Instituto de Empresa Business School)

Abstract

We estimate and compare the forecasting performance of several dynamic models of returns of different hedge fund strategies. The conditional mean of return is an ARMA process while its conditional volatility is modeled according to the GARCH specification. In order to take into account the high level of risk of these strategies, we also consider a Markov switching structure of the parameters in both equations to capture jumps. Finally, the one-step-ahead out-of-sample forecast performance of different models is compared.

Suggested Citation

  • Szabolcs Blazsek & Anna Downarowicz, 2008. "Regime switching models of hedge fund returns," Faculty Working Papers 12/08, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp1208
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    File URL: http://www.unav.edu/documents/10174/6546776/1228599113_WP_12_08_Blazsek_Downarowicz.pdf
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    References listed on IDEAS

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    Cited by:

    1. Heidari , Hassan & Refah-Kahriz, Arash & Hashemi Berenjabadi, Nayyer, 2018. "Dynamic Relationship between Macroeconomic Variables and Stock Return Volatility in Tehran Stock Exchange: Multivariate MS ARMA GARCH Approach," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 5(2), pages 223-250, August.
    2. Luo, Cuicui & Seco, Luis & Wu, Lin-Liang Bill, 2015. "Portfolio optimization in hedge funds by OGARCH and Markov Switching Model," Omega, Elsevier, vol. 57(PA), pages 34-39.
    3. Diteboho Xaba & Ntebogang Dinah Moroke & Ishmael Rapoo, 2019. "Modeling Stock Market Returns of BRICS with a Markov-Switching Dynamic Regression Model," Journal of Economics and Behavioral Studies, AMH International, vol. 11(3), pages 10-22.
    4. Slavutskaya, Anna, 2013. "Short-term hedge fund performance," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4404-4431.

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    More about this item

    Keywords

    Markov switching ARMA-GARCH; forecasting performance;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • 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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