Testing non-linear dependence in the hedge fund industry

Javier Mencia ()

No 1007, Working Papers from Banco de España

Abstract: This paper proposes a parsimonious approach to test non-linear dependence on the conditional mean and variance of hedge funds with respect to several market factors. My approach introduces non-linear dependence by means of empirically relevant polynomial functions of the factors. For comparison purposes, I also consider multifactor extensions of tests based on piecewise linear alternatives. I apply these tests to a database of monthly returns on 1,071 hedge funds. I find that non-linear dependence on the mean is highly sensitive to the factors that I consider. However, I obtain a much stronger evidence of nonlinear dependence on the conditional variance.

Keywords: Generalised Hyperbolic Distribution; Correlation; Asymmetry; Multifactor Models (search for similar items in EconPapers)
JEL-codes: C12 C22 C32 G11 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-03
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fmk
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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/10/Fic/dt1007e.pdf First version, March 2010 (application/pdf)

Related works:
Journal Article: Testing Nonlinear Dependence in the Hedge Fund Industry (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1007

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