Multi-moment risk, hedging strategies, & the business cycle
François-Éric Racicot () and
International Review of Economics & Finance, 2018, vol. 58, issue C, 637-675
We study the asymmetric responses of hedge fund return moments—especially higher moments as measured by return co-skewness and co-kurtosis—to macroeconomic and financial shocks depending on the phase of the business cycle. Similarly to previous papers on hedge fund systematic market risk (beta), we find that hedge funds seem to monitor their return co-skewness and co-kurtosis. The response of their return moments to VIX shocks—our indicator of macroeconomic and financial uncertainty—is particularly important, hedge funds reducing their beta and co-kurtosis and increasing their co-skewness following a (positive) VIX shock. Overall, the representative hedge fund tends to behave as an insurance seller in economic expansion and as an insurance buyer in recession or crisis. Finally, VIX shocks contribute to increase systemic risk in the hedge fund industry.
Keywords: Hedge fund; Multi-moment risk; Non-linear VAR; Business cycle; Systemic risk (search for similar items in EconPapers)
JEL-codes: C13 C58 G11 G23 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:58:y:2018:i:c:p:637-675
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