EDHEC Business School

About: EDHEC Business School is a education organization based out in Roubaix, France. It is known for research contribution in the topics: Portfolio & Capital asset pricing model. The organization has 294 authors who have published 1749 publications receiving 42687 citations. The organization is also known as: Ecole des Hautes Etudes Commerciales du Nord & EDHEC Business School.

Bayesian inference for hedge funds with stable distribution of returns

Abstract: Recently, a body of academic literature has focused on the area of stable distributions and their application potential for improving our understanding of the risk of hedge funds. At the same time, research has sprung up that applies standard Bayesian methods to hedge fund evaluation. Little or no academic attention has been paid to the combination of these two topics. In this paper, we consider Bayesian inference for alpha-stable distributions with particular regard to hedge fund performance and risk assessment. After constructing Bayesian estimators for alpha-stable distributions in the context of an ARMA-GARCH time series model with stable innovations, we compare our risk evaluation and prediction results to the predictions of several competing conditional and unconditional models that are estimated in both the frequentist and Bayesian setting. We find that the conditional Bayesian model with stable innovations has superior risk prediction capabilities compared with other approaches and, in particular, produced better risk forecasts of the abnormally large losses that some hedge funds sustained in the months of September and October 2008.

Calibrating the Italian Smile with Time-Varying Volatility and Heavy-Tailed Models

Abstract: In this paper, we consider several time-varying volatility and/or heavy-tailed models to explain the dynamics of return time series and to fit the volatility smile for exchange-traded options where the underlying is the main Italian stock index. Given observed prices for the time period we investigate, we calibrate both continuous-time and discrete-time models. First, we estimate the models from a time-series perspective (i.e. under the historical probability measure) by investigating more than 10 years of daily index price log-returns. Then, we explore the risk-neutral measure by fitting the values of the implied volatility for numerous strikes and maturities during the highly volatile period from April 1, 2007 (prior to the subprime mortgage crisis in the US) to March 30, 2012. We assess the extent to which time-varying volatility and heavy-tailed distributions are needed to explain the behavior of the most important stock index of the Italian market.

Determinants of Funds of Hedge Funds' Performance

Abstract: Despite institutional investors9 growing interest in funds of hedge funds, little attention has been paid thus far to their added value and/or the sources of their added value. This is all the more striking in that funds of funds are far from transparent and are, with their double-fee structure, relatively costly investment vehicles. The authors9 objective, as explained in this article, is to fill this research gap and find out whether funds of funds add value through strategic allocation and active management. To this end, the authors ran a return-based style analysis on a sample of 97 funds of funds over the period from 1997 to 2004. The authors found that 89% of the funds of funds added value at the strategic allocation level, but only 31% added value at the active management level. Finally, only 20% of funds of funds created value through both strategic allocation and active management. In other words, if picking best performingfunds is a challenging task, picking best performing funds of funds appears to be equally difficult.