β in the tails

Federico M. Bandi and Roberto Renò

Journal of Econometrics, 2022, vol. 227, issue 1, 134-150

Abstract: Do hedge funds hedge? In negative states of the world, often not as much as they should. For several styles, we report larger market betas when market returns are low (i.e., “beta in the tails”). We justify this finding through a combination of negative-mean jumps in the market returns and large market jump betas: when moving to the left tail of the market return distribution jump dynamics dominate continuous dynamics and the overall systematic risk of the fund is driven by the higher systematic risk associated with return discontinuities. Methodologically, the separation of continuous and discontinuous dynamics is conducted by exploiting the informational content of the high-order infinitesimal cross-moments of hedge-fund and market returns.

Keywords: Hedge funds; Diffusive risk; Jump risk; Beta (search for similar items in EconPapers)
JEL-codes: C32 C58 G23 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:227:y:2022:i:1:p:134-150

DOI: 10.1016/j.jeconom.2020.06.006

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