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Financial Markets and Portfolio Management

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14-08-2018

Risk measurement distortion: an improved model of return smoothing

Authors: Jiaqi Chen, Michael L. Tindall, Wenbo Wu

Published in: Financial Markets and Portfolio Management | Issue 3/2018

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Abstract

We examine the effects of smoothed hedge fund returns on standard deviation, skewness, and kurtosis of return and on correlation of returns using a MA(2)-GARCH(1,1)-skewed-t representation instead of the traditional MA(2) model employed in the literature. We present evidence that our proposed representation is more consistent with the behavior of hedge fund returns than the traditional MA(2) representation and that the traditional method tends to overstate the degree of smoothing observed in hedge fund returns. We examine methods for correcting the distortive effects of smoothing using our representation.

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Title: Risk measurement distortion: an improved model of return smoothing
Authors: Jiaqi Chen
Michael L. Tindall
Wenbo Wu
Publication date: 14-08-2018
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 3/2018
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-018-0316-5

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