On the optimality of hedge fund investment strategies: a Bayesian skew t distribution model

John Weirstrass Muteba Mwamba

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a forward looking model for selection of hedge fund investment strategies. Given excess skewness observed in hedge funds’ return distributions, we assume that the historical return distribution is a skewed student t distribution. We implement a Bayesian framework to derive the parameters of the posterior return distribution. The predictive return distribution is easily obtained once the posterior parameters are known by assuming that the unknown future expected returns are equal to the posterior distribution multiplied by the likelihood of unknown future expected returns conditional on available posterior parameters. We derive the predictive mean, predictive variance and predictive skewness from the predictive distribution after twenty-one thousand simulations using GIBS sampler, and solve a multi-objective problem using a data set of monthly returns of investment strategy indices published by the Hedge Fund Research group. Our results show that the methodology presented in this paper provides the highest rate of return (16.79%) with a risk of 2.62% compared to the mean variance, which provides 0.8% rate of return with 1.41% risk respectively.

Keywords: Predictive distribution; skew t distribution; posterior distribution; prior distribution; MCMC simulations; GIBS sampler (search for similar items in EconPapers)
JEL-codes: C5 C6 C61 G1 G11 G2 G23 (search for similar items in EconPapers)
Date: 2012-05-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in African Journal of Business Management 36.6(2012): pp. 10015-10024

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/50323/1/MPRA_paper_50323.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50323

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().