Journal
ECONOMIC MODELLING
Volume 78, Issue -, Pages 73-97Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.econmod.2018.08.016
Keywords
Hedge fund; Higher moments; Macroeconomic shocks; Markov regime-switching model; EGARCH; Robust IV
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Funding
- WAG Business School
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We investigate how macroeconomic and financial uncertainty impacts the behavior of hedge fund strategy higher moments i.e., co-skewness and co-kurtosis-and their respective cross-sectional dispersions. Consistent with theoretical models, we find that strategy managers trade off these two higher moments when building optimal portfolios. Moreover, these trade-offs depend on the kind of strategy. Our experiments show that the VIX and its conditional variance are the most important factors affecting higher moment risk in the hedge fund industry. They also reveal that the behavior of hedge fund strategies is very asymmetric depending on the phase of the business cycle. In contrast to studies which rely on the mean-variance setting, we find that systemic risk as measured by the cross-sectional dispersions of higher moments tends to decrease in the low regime. The indicators of market volatility play a decisive role to explain this decline in systemic risk.
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