Hedge Fund Return Dependence: Model Misspecification or Liquidity Spirals?

We test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered (for economic fundamentals) hedge fund index returns and the links between volatility, liquidity shocks, and hedge fund return clustering. Evidence supports the model misspecifica...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial and quantitative analysis 2017-10, Vol.52 (5), p.2157-2181
Main Authors: Sias, Richard, Turtle, Harry J., Zykaj, Blerina
Format: Article
Language:English
Subjects:
Bias
Hedge funds
Hypotheses
Prices
Quantitative analysis
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We test whether model misspecification or liquidity spirals primarily explain the observed excess dependence in filtered (for economic fundamentals) hedge fund index returns and the links between volatility, liquidity shocks, and hedge fund return clustering. Evidence supports the model misspecification hypothesis: i) hedge fund filtered return clustering is symmetric, ii) filtered Short Bias fund returns exhibit negative dependence with filtered returns for other hedge fund types, iii) negative liquidity shocks are associated with clustering in both tails and market volatility subsumes the role of negative liquidity shocks, and iv) these same patterns appear in size-sorted equity portfolios.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109017000679