Evidence for hedge fund predictability from a multivariate Student's t full-factor GARCH model

Ioannis Vrontos

Journal of Applied Statistics, 2012, vol. 39, issue 6, 1295-1321

Abstract: Extending previous work on hedge fund return predictability, this paper introduces the idea of modelling the conditional distribution of hedge fund returns using Student's t full-factor multivariate GARCH models. This class of models takes into account the stylized facts of hedge fund return series, that is, heteroskedasticity, fat tails and deviations from normality. For the proposed class of multivariate predictive regression models, we derive analytic expressions for the score and the Hessian matrix, which can be used within classical and Bayesian inferential procedures to estimate the model parameters, as well as to compare different predictive regression models. We propose a Bayesian approach to model comparison which provides posterior probabilities for various predictive models that can be used for model averaging. Our empirical application indicates that accounting for fat tails and time-varying covariances/correlations provides a more appropriate modelling approach of the underlying dynamics of financial series and improves our ability to predict hedge fund returns.

Date: 2012
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:taf:japsta:v:39:y:2012:i:6:p:1295-1321

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DOI: 10.1080/02664763.2011.644771

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