Risk measurement distortion: an improved model of return smoothing

Jiaqi Chen (), Michael L. Tindall () and Wenbo Wu ()
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Jiaqi Chen: Twin Tree Capital Management
Michael L. Tindall: Federal Reserve Bank of Dallas
Wenbo Wu: The University of Texas at San Antonio

Financial Markets and Portfolio Management, 2018, vol. 32, issue 3, No 3, 297-310

Abstract: 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.

Keywords: Return smoothing; GARCH; Skewed-t (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11408-018-0316-5

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