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Risk measures for autocorrelated hedge fund returns

Antonio Di Cesare (), Philip Stork and Casper de Vries

No 831, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov(2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.

Keywords: hedge funds; serial correlation; systemic risk; VaR; Pareto distribution (search for similar items in EconPapers)
JEL-codes: G12 G23 G28 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Related works:
Journal Article: Risk Measures for Autocorrelated Hedge Fund Returns (2015) Downloads
Working Paper: Risk Measures for Autocorrelated Hedge Fund Returns (2011) Downloads
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