a spatial mean variance mip model for energy market risk analysis the paper presents a short term market risk model based on the markowitz mean variance method for spatial electricity markets the spatial nature is captured using the correlation of geographically separated markets and the consideration of wheeling administration the model also includes transaction costs and other practical constraints resulting in a mixed integer programming mip model the incorporation of those practical constraints makes the model more attractive than the traditional markowitz portfolio model with continuity a case study is used to illustrate the practical application of the model the results show that the mip portfolio efficient frontier is neither smooth nor concave the paper also considers the possible extension of the model to other energy markets including natural gas and oil markets

by force of demand explaining international comovements abstract this paper explores the possibility that economic fluctuations may be largely demand driven it is shown that the stylized open economy business cycle regularities documented by feldstein and horioka 1980 the economic journal 90 june 314 329 and backus et al 1992 journal of political economy 100 4 745 775 can be explained by demand shocks alone even in a standard general equilibrium model frictions such as market incompleteness increasing returns to scale and sticky prices do not appear to be the preconditions for resolving these long standing puzzles

omega performance measure and portfolio insurance abstract we analyze the performance of the two main portfolio insurance methods the obpi and cppi strategies using downside risk measures for this purpose we introduce kappa performance measures and especially the omega measure these measures take account of the entire return distribution we show that the cppi method performs better than the obpi as a by product we determine the set of threshold values for these risk reward performance measures

hedge funds the good the bad and the lucky we develop an estimation approach based on a modified expectation maximization em algorithm and a mixture of normal distributions associated with skill groups to assess performance in hedge funds by allowing luck to affect both skilled and unskilled funds we estimate the number of skill groups the fraction of funds from each group and the mean and variability of skill within each group for each individual fund we propose a performance measure combining the fund s estimated alpha with the cross sectional distribution of fund skill in out of sample tests an investment strategy using our performance measure outperforms those using estimated alpha and t statistic

technical analysis and liquidity provision the apparent conflict between the level of resources dedicated to technical analysis by practitioners and academic theories of market efficiency is a long standing puzzle we explore a previously unexamined feature of technical analysis namely its relation to liquidity provision we demonstrate that support and resistance levels coincide with peaks in depth on the limit order book and moving average forecasts reveal information about the relative position of depth on the book furthermore we show that these relationships stem from technical rules locating depth already in place on the limit order book copyright 2004 oxford university press

flows price pressure and hedge fund returns the authors studied how capital flows affect hedge fund returns and found that funds with high inflows outperform funds with high outflows during the month of the flows this immediate reaction combined with feedback trading gives rise to a cycle flows exert price pressure this effect on returns induces more flows and these flows cause further price pressure the cycle is so strong that it takes two years for a full return reversal and it contributes to the observed persistence in hedge fund performance the impact of flows on returns has clear implications for performance evaluation one third of estimated hedge fund alphas are due to flows

liquidity risk return predictability and hedge funds performance an empirical study this article analyzes the effect of liquidity risk on the performance of equity hedge fund portfolios similarly to avramov kosowski naik and teo 2007 2011 we observe that before accounting for the effect of liquidity risk hedge fund portfolios that incor porate predictability in managerial skills generate superior performance this outperfor mance disappears or weakens substantially for most emerging markets event driven and long short hedge fund portfolios once we account for liquidity risk moreover we show that the equity market neutral and long short hedge fund portfolios alphas also entail rents for their service as liquidity providers these results hold under various robustness tests

the risk in hedge fund strategies theory and evidence from trend followers hedge fund strategies typically generate option like returns linear factor models using benchmark asset indices have difficulty explaining them following the suggestions in glosten and jagannathan 1994 this article shows how to model hedge fund returns by focusing on the popular trend following strategy we use lookback straddles to model trend following strategies and show that they can explain trend following funds returns better than standard asset indices though standard straddles lead to similar empirical results lookback straddles are theoretically closer to the concept of trend following our model should be useful in the design of performance benchmarks for trend following funds

demand shocks and economic fluctuations this paper studies conditions under which demand side shocks can generate realistic business cycles in rbc models although highly persistent demand shocks are necessary for generating procyclical investment variable capacity utilization and habit formation can reduce the required degree of persistence

a business cycle model with variable capacity utilization and demand disturbances abstract we develop a dynamic general equilibrium model with demand preference shocks estimated using hall s j labour economics 15 1997 223 residual that replicates u s business cycles well at least compared to the real business cycle models the key factor is cyclical capital utilization which is based on imperfect competition slow adjustments in capital stock and fixed requirement of labor input we also demonstrate theoretically that a representative agent economy with preference shocks could be viewed as the reduced form of a heterogeneous agents economy with incomplete markets specifically a heterogeneous agents economy with incomplete markets is aggregated into a representative agent economy with preference shocks this result would provide a microeconomic foundation for preference shock models it is also shown that a shock to marginal utility of consumption and a shock to marginal disutility of labor have different effects

price discrimination by u s and german exporters the insensitivity of the u s trade balance to the sharp depreciation of the dollar in the past three years has revived interest in the relationship between exchange rates and the trade balance a central issue in most analyses of the relation between the current account and the exchange rate concerns the price adjustment process the simple integrated competitive market model predicts that local currency prices should change in proportion to the nominal exchange rate for a country too small to influence world prices the relationship between local currency import prices and exchange rates has been referred to as the pass through relationship in the empirical literature in international economics if the proportional relationship between import prices and exchange rates holds pass through is said to be complete accounts of recent u s experience cite the failure of dollar prices of imported goods to rise in proportion to exchange rates i e incomplete pass through as an important factor in explaining the persistence of the trade deficit unfortunately observations on pass through alone provide limited insight into the behavior of markets since incomplete pass through is consistent with at least two fundamentally different paradigms one is the standard competitive model of trade in which the law of one price holds but exchange rate fluctuations are associated with large changes in import demand due to other factors for example if dollar appreciation is correlated with increases in world demand and industry marginal cost is increasing then pass through will be less than complete the other is an imperfectly competitive model in which exporters are capable of price discriminating across destination markets a phenomenon paul krugman 1987 has labeled pricing to market in this model incomplete pass through is typically associated with fluctuations in the markup of price over marginal cost on exports 2 these fluctuations in markups are believed to be countryspecific they do not reflect the behavior of prices to other export destinations both models are plausible explanations of recent u s experience unfortunately it is impossible to distinguish between these competing models using only information on import prices and exchange rates for a single country in order to distinguish between the competing models an empirical analysis of goods prices and exchange rates must be capable of measuring either marginal cost or the markup over marginal cost either of these tasks poses formidable empirical problems much of the empirical literature in industrial organization has been concerned with precisely these issues since markups are an important measure of the competitiveness of industries

carry trades and the performance of currency hedge funds we investigate the performance and risk of currency hedge funds using a large and unique consolidated currency hedge fund dataset we find that a substantial number of hedge funds generate returns that exceed foreign exchange risk premia obtained through carry trades the best alpha generating funds exhibit a performance that persists over a one year horizon this performance persistence is mostly due to compensation for currency risk taking as there is no strong evidence of remuneration for active management the results are robust to biases affecting hedge fund returns alternative carry trade benchmarks and different methodologies used to correct for sample variability

the structuralist theory of imported inflation an application to south africa this study emphasizes the importance of identifying the origin of inflation in the present context of inflation targeting by many emerging market and transition economies the analysis shows based on south african data how structural supply and demand inflation can be distinguished the results indicate that south africa s inflation experience between 1973q1 and 1998q4 is characterized by two monetary regimes during the first regime 1973q1 1984q4 the long run cause of inflation is demand pull the second regime 1987q1 1998q4 represents major changes to structural imported and cost push inflation the two year period 1985 1986 signifies structural change from the first to the second regime moreover the results in the second regime remain robust when the inflation model is subjected to new out of sample data until 2001q2 evidence of structural imported inflation in the second regime suggests that inflation should not entirely be squeezed out of the system nor should it necessarily be k

cumulant instrument estimators for hedge fund return models with errors in variables we revisit the factors incorporated in asset pricing models following the recent developments in financial markets i e the rise of shadow banking and the change in the transmission channel of monetary policy we propose two versions of the fung and hsieh 2004 hedge fund return model especially an augmented market model which accounts for the new dynamics of financial markets and the procyclicality of hedge fund returns we run these models with an innovative hausman procedure tackling the measurement errors embedded in the models factor loadings our empirical method also allows for confronting the drawbacks of the instruments used to estimate hedge fund asset pricing models

the use of risk and return models for multiattribute decisions with decomposable utilities normatively oriented approaches to decision making under uncertainty occupy a major portion of the literature of decision analysis among the proposed approaches the von neumann morgenstern expected utility eu theory has been the most prominent model of rational choice despite some controversies that surround this model with respect to its descriptive ability as well as the plausibility of utility assessment in actual decision situations 6 10 although most applications of the eu model have been concerned with decisions involving monetary outcomes its scope is not limited to any particular class of conse quences the basic appeal of the model is attributable partly to its generality in this regard and more importantly to the apparent reasonableness of its preferentialaxioms in the context of decisions with monetary outcomes several alternatives to the eu model have been proposed including the mean variance and mean semivariance models that have found popularity in the economies and finance litera ture see 4 8 and 9 in contrast to the eu theory where a decision maker s preferences among uncertain prospects are assumed given preferences in these models are formulated in terms of two attributes that are presumed to character ize all available choices in the mean semivariance model for example uncer tain prospects are viewed entirely in terms of their means and below target semivariances a generalization of this model was examined by fishburn 2 who showed that the general mean risk model exhibits a certain degree of compatibility with the eu model more recently holthausen 5 showed that this compatibility is significantly enhanced when mean is replaced by a return measure de fined as a probability weighted function of above target deviations specifically holthausen proved that this model yields the same preferences as the eu model whenever the expected utility function has the form

consistent testing for stochastic dominance under general sampling schemes we propose a procedure for estimating the critical values of the extended kolmogorov smirnov tests of stochastic dominance of arbitrary order in the general k prospect case we allow for the observations to be serially dependent and for the first time we can accommodate general dependence amongst the prospects which are to be ranked also the prospects may be the residuals from certain conditional models opening the way for conditional ranking we also propose a test of prospect stochastic dominance our method is based on subsampling and we show that the resulting tests are consistent and powerful against some n 1 2 local alternatives we also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably we describe an alternative method for obtaining critical values based on recentring the test statistic and using full sample bootstrap methods we compare the two methods in theory and in practice

evaluating the impact of inequality constraints and parameter uncertainty on optimal portfolio choice we present new analytical results for the impact of portfolio weight constraints on an investor s optimal portfolio when parameter uncertainty is taken into account while it is well known that parameter uncertainty and imposing weight constraints results in reduced certainty equivalent returns in the general case there are no analytical results in a special case commonly used in the funds management literature we derive analytical expression for the certainty equivalent loss that does not depend on the risk aversion parameter we illustrate our theoretical results using hedge fund data from the perspective of a fund of fund manager our contribution is to formalize the framework to investigate this problem as well as providing tractable analytical solutions that can be implemented using either simulated or asset manager returns

hedge funds risk and return from a database that is relatively free of bias this article provides measures of the returns of hedge funds and of the distinctly nonnormal characteristics of the data the results include risk adjusted measures of performance and tests of the degree to which hedge funds live up to their claim of market neutrality the substantial attrition of hedge funds is examined the determinants of hedge fund demise are analyzed and results of tests of return persistence are presented the conclusion is that hedge funds are riskier and provide lower returns than is commonly supposed

macroeconomic fluctuations and the allocation of time what are the fundamental driving forces of macroeconomic fluctuations in particular why do people spend more time working in booms and less in recessions these are basic questions of macroeconomics recent thinking has emphasized technology shifts preference shifts and changes in government purchases as likely driving forces it is useful to distinguish atemporal and intertemporal effects of the driving forces under standard assumptions the technology shift has no effect through atemporal channels because income and substitution effects exactly offset a straightforward decomposition of movements of employment attributes most of them to the atemporal effects of preference shifts

higher risk lower returns what hedge fund investors really earn abstract the returns of hedge fund investors depend not only on the returns of the funds they hold but also on the timing and magnitude of their capital flows in and out of these funds we use dollar weighted returns a form of internal rate of return irr to assess the properties of actual investor returns on hedge funds and compare them to buy and hold fund returns our main finding is that annualized dollar weighted returns are on the magnitude of 3 to 7 lower than corresponding buy and hold fund returns using factor models of risk and the estimated dollar weighted performance gap we find that the real alpha of hedge fund investors is close to zero in absolute terms dollar weighted returns are reliably lower than the return on the standard poor s s p 500 index and are only marginally higher than the risk free rate as of the end of 2008 the combined impression from these results is that the return experience of hedge fund investors is much worse than previously thought

stochastic dominance vs mean variance portfolio analysis an empirical evaluation most of the work in portfolio theory in the past decade has been based on the principle of utility maximization where either the investor s utility function is assumed to be a second degree polynomial with a positive first derivative and a negative second derivative or the probability functions are assumed to be normal if at least one of these conditions holds it can be shown that choosing among risky assets on the basis of their mean and variance only is consistent with the von neumann morgenstern utility maximization model thus given the above assumptions the incorporation of higher moments of a distribution and the adoption of alternative approaches to portfolio selection have largely been ignored in favor of the more familiar mean variance approaches

asset allocation risk models for alternative investments often the lack of mark to market data lures investors into the misconception that alternative asset classes and strategies represent somewhat of a free lunch this article proposes solutions to measuring mark tomarket risk in alternative and illiquid investments the authors describe how to estimate risk factor exposures when the available asset return series may be smoothed owing to the difficulty of obtaining market based valuations they show that alternative investments are exposed to many of the same risk factors that drive stock and bond returns i nvestors have long recognized that asset class returns are driven by a common set of risk factors asset allocators often use the risk factor approach to improve portfolio diversification and to translate macroeconomic views into expected asset returns in practice implementing a risk factor approach to asset allocation requires mapping asset classes to their underlying factor exposures which can be challenging especially for asset classes for which the available historical data are limited or biased in this article we propose solutions to measuring mark to market risk in alternative and illiquid investments we describe how to estimate risk factor exposures when the available asset return series may be smoothed owing to the difficulty of obtaining market based valuations we show that alternative investments are exposed to many of the same risk factors that drive stock and bond returns our approach has profound implications for risk estimation in an asset allocation context for example figure 1 shows the difference between adjusted and reported from index returns volatilities for several alternative investments as well as for public markets equities and bonds it also shows a measure of autocorrelation which highlights how return smoothing contributes to the misestimation of volatility the bottom line is that alternative investments are much more volatile on a mark to market basis than their reported index returns would suggest this bias tends to be more pronounced for indices that are smoothed in this article we describe the methodology used to arrive at these adjustments and include other key risk measures relevant to asset allocation we recognize that there already is a significant body of literature that attempts to estimate risk factor exposures for various individual alternative investments and strategies however little research has been done to estimate the risk factor exposures across all alternatives within an internally consistent unified risk factor framework given increased allocations to alternative investments in institutional investors portfolios we see an urgent need to develop a consistent approach that directly integrates the risks of alternative assets with the rest of investors portfolios

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

hedge fund benchmarks information content and biases we discuss the information content and potential measurement biases in hedge fund benchmarks hedge fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases in addition broad based indexes mask the diversity of individual hedge fund return characteristics consequently these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds the approach to constructing hedge fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge fund performance is to observe the investment experience of hedge fund investors themselves the funds of hedge funds fofs in terms of measurement biases returns of fofs can deliver a cleaner estimate of the investment experience of hedge fund investors than the traditional approach in terms of risk characteristics indexes of fofs are more indicative of the demand side dynamics driven by hedge fund investors p

forecasts of the managed futures market an empirical analysis abstractalternative investments including managed futures are primarily intended for institutional investors and for very wealthy individual investors it therefore seems logical to assume that the increase of wealth on a global scale can be a factor impacting the value of transactions in individual segments of the alternative investment market the purpose of this article is to indicate the factors affecting growth of managed futures transactions another research goal is to answer the question does the increase of wealth on a global scale affect the value of the managed futures transactions the article will also present short term forecasts of the transactions on the managed futures market for the years 2015 2017 the forecasts which will be constructed are meant to present possible scenarios of the market s further development evolution of the alternative investment segment leads to development of those categories which fulfil the expectations of market participants and meet the requirement and

asset based style factors for hedge funds asset based style factors link returns of hedge fund strategies to observed market prices they provide explicit and unambiguous descriptions of hedge fund strategies that reveal the nature and quantity of risk asset based style factors are key inputs for portfolio construction and for benchmarking hedge fund performance on a risk adjusted basis we used previously developed models to construct asset based style factors and demonstrate that one model correctly predicted the return behavior of trend following strategies during out of sample periods in particular during stressful market conditions like those of september 2001

a longer look at the asymmetric dependence between hedge funds and the equity market this paper reexamines at a range of investment horizons the asymmetric dependence between hedge fund returns and market returns given the current availability of hedge fund data the joint distribution of longer horizon returns is extracted from the dynamics of monthly returns using the filtered historical simulation we then apply the method based on copula theory to uncover the dependence structure therein while the direction of asymmetry remains unchanged the magnitude of asymmetry is attenuated considerably as the investment horizon increases similar horizon effects also occur on the tail dependence our findings suggest that nonlinearity in hedge fund exposure to market risk is more short term in nature and that hedge funds provide higher benefits of diversification the longer the horizon

margins and hedge fund contagion funding risk measures the extent to which a fund can borrow money by posting collateral using a novel measure of funding risk based on futures margins we are able to empirically identify the mechanism by which changes in funding risk affect the likelihood of contagion an increase in margins of the order of magnitude observed during the subprime crisis increases the probability of contagion among certain types of funds by up to 34 our analysis shows that some types of hedge funds are more vulnerable to contagion than others our results also suggest that policies that limit the magnitude of changes in margins over short periods of time may reduce the likelihood of contagion among hedge funds

forecasting the performance of hedge fund styles this article predicts the relative performance of hedge fund investment styles using time varying conditional stochastic dominance tests these tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns during the recent financial turmoil our tests predict a superior performance for the global macro investment style compared with the other strategies of directional traders the dedicated short bias investment style is stochastically dominated by the other directional styles these results are confirmed by simple nonparametric tests constructed from realized excess returns further by utilizing a cross validation method for optimal bandwidth parameter selection we discover the factors that have predictive power regarding the density of hedge fund returns we observe that different factors have forecasting power for different regions of the returns distribution and more importantly that the fung and hsieh factors have power not only for describing the risk premium but also if appropriately exploited for density forecasting

portfolio performance evaluation old issues and new insights this article presents a model that provides insights about various measures of portfolio performance the model explores several criticisms of these measures these include the problem of identifying an appropriate benchmark portfolio the possibility of overestimating risk because of market timing ability and the failure of informed investors to earn positive risk adjusted returns because of increasing risk aversion the article argues that these need not be serious impediments to performance evaluation

only winners in tough times repeat hedge fund performance persistence over different market conditions we provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets specifically we construct two performance measures downsidereturns and upsidereturns conditioned on the level of overall hedge fund sector returns after adjusting for risks funds in the highest downsidereturns quintile outperform funds in the lowest quintile by about 7 in the subsequent year whereas funds with better upsidereturns do not outperform subsequently the downsidereturns can predict future fund performance over a horizon as long as 3 years for both winners and losers and for funds with few share restrictions

zero r 2hedge funds and market neutrality factor models yield an r 2 insignificantly different from 0 for one third of hedge funds in a broad sample these funds illustrate the concept of market neutrality and feature lower volatilities higher sharpe ratios and higher alphas than other funds indicating that they provide a successful alternative investment however large portfolios of zero r 2 funds contain fully half the volatility of portfolios of other funds suggesting that they feature substantial systematic risk furthermore these funds display an increased probability of failure even after controlling for idiosyncratic volatility these results indicate the presence of an omitted factor that exposes investors to significant downside risk

are market neutral hedge funds really market neutral one can consider the concept of market neutrality for hedge funds as having breadth and depth breadth resects the number of market risks to which a fund is neutral while depth resects the completeness of the neutrality of the fund to market risks we focus on market neutrality depth and propose ve different neutrality concepts mean neutrality nests the standard correlation based de nition of neutrality variance neutrality value at risk neutrality and tail neutrality all relate to the neutrality of the risk of the hedge fund to market risks finally complete neutrality corresponds to independence of the fund to market risks we suggest statistical tests for each neutrality concept and apply the tests to a combined database of monthly market neutral hedge fund returns from the hfr and tass hedge fund databases we nd that around one quarter of these funds exhibit some signi cant exposure to market risk

exchange rates and import prices for a small open economy the case of ireland as a further contribution to the growing international literature on exchange rate pass through pt this study assesses the extent of pt for irish import prices over the period 1963 to 1995 it fills two important gaps in the literature by making due allowance for the time series properties of the data and by concentrating on the case of a small open economy in order to assess the extent of pt a mark up model for aggregate import unit values is employed it is argued that the usual single equation mark up estimation technique leads to seriously biased and inefficient estimates of the degree of pt as it ignores the strong simultaneity of import prices and domestic competing prices this study makes use of the johansen technique to allow for such simultaneity and uncovers two long run equilibrium relationships among the data for import unit values and domestic competing prices and confirms the existence of very close to full pt for both previous results in the literature demonstrating substantially

volatility and welfare abstract this paper explores the relationship between volatility and welfare even though households prefer smooth streams of consumption and leisure welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic we provide some analytical results for a model without capital and do some quantitative exercises in a model with capital and a variety of shocks welfare is greater in high shock volatility regimes under plausible parameter values augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare

the road less traveled strategy distinctiveness and hedge fund performance we investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance we propose a measure of the distinctiveness of a fund s investment strategy based on historical fund return data we call the measure the strategy distinctiveness index sdi we document substantial cross sectional variations as well as strong persistence in sdi our main result indicates that on average a higher sdi is associated with better subsequent performance after adjusting for risk funds in the highest sdi quintile outperform funds in the lowest quintile by 3 5 in the subsequent year the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

pricing to market in a small open economy the determinants of norwegian import prices of manufactures are investigated over the period 1970 1 1991 4 multivariate cointegration analysis establishes a long run relationship between import prices foreign prices the exchange rate and domestic unit labour costs normalized on import prices the long run elasticities are 0 63 foreign prices and the exchange rate and 0 37 domestic costs deviations from this relationship are highly significant in a structural import price equation which also contains positive effects of growth in domestic demand and inflation as well as a negative effect from the norwegian unemployment rate the estimated parameters appear reasonably stable within the sample

equity market neutral hedge funds and the stock market an application of score driven copula models in this article we study the time varying market neutrality of equity market neutral hedge funds we use data from the hedge fund research equity market neutral index hfrx eh which represents

exploring efficiency differences over time in the spanish banking industry abstract over the last 15 years the competitive conditions under which spanish banking firms operate have become much tighter deregulation has affected both banks and savings banks allowing them to expand geographically and to choose less regulation conditioned output mixes this paper analyzes how in these circumstances banking efficiency has been affected considering two specifications of output and analyzing the dynamics of the entire distribution not only mean and standard deviation results differ depending on the output definition but they show that in general efficiency scores exhibit dynamic patterns that only two moments of the distribution hardly capture in particular regardless of the output definition considered efficiency scores were more dispersed in 1985 and more concentrated in 1995 and there were substantial changes in firms efficiency relative positions as measured by transition probability matrices in addition the multi modality of the distributions has almost disappeared at the end of the period

does growing wealth influence hedge funds development an empirical analysis abstractalternative investments such as hedge funds have in last years become an integral part of the investment portfolios of the wealthy the article s goal is also to answer the following research question does the global wealth of the world have impact on the global value of the hedge funds assets we also try to forecast the value of the hedge funds assets for the next years 2015 2017 the results from this study would also be valuable to investors and other stakeholders such as the regulators and the creditors of the hedge funds

the performance of us equity mutual funds the paper examines the performance of us no load equity mutual funds fund performance is derived using stochastic frontier analysis for a flexible functional form this analysis allows us to derive parametric estimates of efficiency scores for each fund in our sample for the first time in the literature our results indicate that us no load equity funds display varying levels of efficiency over time but also depending on size and on investment style robustness analysis reaffirm the efficiency scores remain consistent across different selections of inputs and outputs as well as the underlying distribution of the return having estimated each fund s efficiency in the sample we unveil their underlying dynamics also with respect to risk and operational characteristics such as flows assets and morningstar star ratings panel var estimations reveal that the response of funds efficiency to a shock in risk is positive and substantial some evidence of reverse causality is also observed finally we extend our analysis to investigate the relationship between funds performance and key covariates across subgroups defined by size

do hedge funds deliver alpha a bayesian and bootstrap analysis abstract using a robust bootstrap procedure we find that top hedge fund performance cannot be explained by luck and hedge fund performance persists at annual horizons moreover we show that bayesian measures which help overcome the short sample problem inherent in hedge fund returns lead to superior performance predictability sorting on bayesian alphas relative to ols alphas yields a 5 5 per year increase in the alpha of the spread between the top and bottom hedge fund deciles our results are robust and relevant to investors as they are neither confined to small funds nor driven by incubation bias backfill bias or serial correlation

brics how important is the exchange rate pass through this paper analyses the exchange rate pass through erpt into domestic consumer prices in brics brazil russia india china and south africa countries from mid 1990s onwards by using three different econometric approaches i e the single equation approach the var approach and the time varying parameter approach it is also studied the role of macroeconomic determinants in erpt our results suggest that a erpt is higher for the emerging markets with mostly floating exchange rates brazil russia and south africa than for the other brics countries b exchange rate explains on average around the 40 of the price variance for brazil russia and south africa and c inflation volatility exchange rate volatility and openness seem to be the key macroeconomic determinants in brics countries

assessing and valuing the non linear structure of hedge fund returns several studies have put forward the non linear structure and option like features of returns associated with hedge fund strategies the authors provide a statistical methodology to test for such non linear features with the returns on any benchmark portfolio they estimate the portfolio of options that best approximates the returns of a given hedge fund account for this search in the statistical testing of the contingent claim features and test whether the identi ed non linear features have a positive value the authors nd that not all categories of funds exhibit signi cant non linearities and that only a few strategies as a group provide signi cant value to investors individual funds may still provide value in

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

correlation risk and optimal portfolio choice we develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the de gree of correlation across industries countries or asset classes is stochastic optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk we find that the hedging demand is typically larger than in univari ate models and it includes an economically significant covariance hedging compo nent which tends to increase with the persistence of variance covariance shocks the strength of leverage effects the dimension of the investment opportunity set and the presence of portfolio constraints this paper develops a new multivariate modeling framework for intertempo ral portfolio choice under a stochastic variance covariance matrix we consider an incomplete market economy in which stochastic volatilities and stochastic correlations follow a multivariate diffusion process in this setting volatili ties and correlations are conditionally correlated with returns and optimal portfolio strategies include distinct hedging components against volatility and correlation risk we solve the optimal portfolio problem and provide simple closed form solutions that allow us to study the volatility and covariance hedg ing demands in realistic asset allocation settings we document the importance of modeling the multivariate nature of second moments especially in the con text of optimal asset allocation and find that the optimal hedging demand can be significantly different from the one implied by more common models with constant correlations or single factor stochastic volatility an important thread within the asset pricing literature has documented the characteristics of the time variation in the covariance matrix of asset

dodd franking the hedge funds abstract this paper analyzes hedge fund performance risk and fund flows before and after the implementation of the dodd frank act the data indicates that relative to non us hedge funds us hedge funds that are regulated under dodd frank have lower fund alphas in the post dodd frank implementation period both statistically and economically significant while the evidence on its effect on risk standard deviations and idiosyncratic risk is mixed we find evidence that there is more fund outflow or less fund inflow for certain us hedge fund strategies after the implementation of dodd frank we show some differences in these findings dependent on fund size and strategy the findings are robust to difference in differences analyses comparing us to non us funds

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 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

exchange rates and import prices for a small open economy the exchange rate pass through for a small open economy in the case of australian manufactured imports in estimated by applying an econometrics procedure which avoids the pit falls in previous studies to a carefully assembled data set for the first time in the literature estimate of pass through based on the johansen 1988 maximum likelihood ml procedure are provided it is found that incomplete pass through has important implications for policy and the macroeconomy

detecting structural breaks and identifying risk factors in hedge fund returns a bayesian approach abstract extending previous work on asset based style factor models this paper proposes a model that allows for the presence of structural breaks in hedge fund return series we consider a bayesian approach to detecting structural breaks occurring at unknown times and identifying relevant risk factors to explain the monthly return variation exact and efficient bayesian inference for the unknown number and positions of the breaks is performed by using filtering recursions similar to those of the forward backward algorithm existing methods of testing for structural breaks are also used for comparison we investigate the presence of structural breaks in several hedge fund indices our results are consistent with market events and episodes that caused substantial volatility in hedge fund returns during the last decade

sentiment hedging how hedge funds adjust their exposure to market sentiment abstract we investigate a new facet of hedging ability among hedge fund managers using a sentiment exposure model we find evidence that fund managers adjust the market exposure of their portfolios to changes in market sentiment out of sample evidence indicates that hedge funds having the highest negative sentiment exposure outperform funds having the highest positive sentiment exposure by 1 7 2 4 per year the results remain persistent for both the sub period analysis and the analysis excluding crisis periods we also find that a hedge fund s willingness to take on sentiment exposure decreases with fund age and fund size and increases with incentive fees our findings remain robust even after controlling for hedge fund data biases as well as using alternative sentiment measures

hedge fund performance 1990 2000 do the money machines really add value we investigate the claim that hedge funds offer investors a superior risk return tradeoff we do so using a continuous time version of dybvig s 1988a 1988b payoff distribution pricing model the evaluation model which does not require any assumptions with regard to the return distribution of the funds to be evaluated is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices from may 1990 april 2000 the results show that as a stand alone investment hedge funds do not offer a superior risk return profile we find 12 indices and 72 individual funds to be inefficient with the average efficiency loss amounting to 2 76 per annum for indices and 6 42 for individual funds part of the inefficiency cost of individual funds can be diversified away funds of funds however are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand alone basis are capable of producing an efficient payoff profile when mixed with the s p 500 the best results are obtained when 10 20 of the portfolio value is invested in hedge funds

profit margin hedging some extension economists and others recommend profit margin hedging as a way to choose the timing of crop sales however the theory behind this strategy recommendation is not well developed this article determines the producer s utility function and price processes where profit margin hedging is optimal profit margin hedging is shown to be an optimal strategy under a highly restricted target utility function even in an efficient market profit margin hedging is profitable if prices are mean reverting copyright 2010 oxford university press

exchange rate pass through abstract the pass through relationship between exchange rate and prices of manufactured exports is examined for korea it is found that exporters take competitors prices at the prime mover of price setting and let profits bear the brunt of adjustment to the exchange rate changes

pricing to market behaviour and exchange rate pass through in japanese exports this paper examines the relationship between exchange rate changes and japanese export pricing behavior employing a methodology which permits the separate measurement of pricing to market behavior and the cost impact of exchange rate changes the results suggest that incomplete pass through of exchange rate changes is a pervasive phenomenon but rejects the widely held view that japanese export firms have relied more heavily on pricing to market strategies during the period of yen appreciation in order to maintain market shares there is also evidence that estimates which capture only pricing to market behavior may over emphasise the degree of pass through to the extent that cost of production is sensitive to exchange rate changes copyright 1994 by royal economic society

a structural model of dynamic market timing this paper derives and analyzes dynamic timing strategies of a fund manager with private information endogenous timing strategies generated by various information structures and skills and associated fund styles are identified endogenous fund returns are characterized in the public information of an uninformed observer timing components are identified the paper provides foundations for regression analyses of fund returns and tests of market timing the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

volatility of aggregate volatility and hedge fund returns abstract this paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time we measure uncertainty via volatility of aggregate volatility vov and construct an investable version through returns on lookback straddles on the chicago board options exchange cboe volatility index vix we find that vov exposure is a significant determinant of hedge fund returns after controlling for fund characteristics we find a robust and significant negative risk premium for vov exposure in the cross section of hedge fund returns we corroborate our results using statistical and parameterized proxies of vov over a longer sample period

incomplete information income redistribution and risk averse median voter behavior this paper extends the median voter model to include risk aversion an expected utility maximizing median voter with an aversion to risk may behave differently than a median voter who is certain a referendum on income redistribution from the top of the distribution to the bottom which fails when the median voter is certain may pass in the extended median voter model economic inefficiencies and the net losses accompanying redistribution are shown to play a pivotal role in determining the behavior of the risk averse median voter the model is illustrated using a one percent demogrant redistribution

combining momentum with reversal in commodity futures this paper examines profitable trading strategies that jointly exploit momentum and reversal signals in commodity futures while the single sort momentum strategies returns 11 14 per annum on average a consistent reversal pattern of momentum profits is pronounced from 12 to 30 months after portfolio formation combining the observed reversal pattern with the momentum signal our double sort strategy returns 20 24 per annum which significantly outperforms single sort strategies the proposed strategy is robust to seasonality effects and sample adjustments in commodity futures the profitability of the double sort strategy cannot be explained by standard risk factors term structure market volatility investor sentiment data mining or transaction costs but appears to be related to global funding liquidity as a consequence the double sort strategy in commodity futures may be employed as a portfolio diversification tool

marginal conditional stochastic dominance this paper introduces the concept of marginal conditional stochastic dominance mcsd which states the conditions under which all risk averse individuals when presented with a given portfolio prefer to increase the share of one risky asset over that of another mcsd rules also answer the question of whether all risk averse individuals include a new asset in their portfolio when assets returns are correlated mcsd criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio an empirical application of mcsd is provided using stocks traded on the new york stock exchange mcsd rules are used to show that in the long run one cannot assert that the market portfolio is inefficient

preference shifts between consumption goods and sectoral changes abstract this paper analyzes under which conditions a shift in the relative preferences between consumption goods may induce a change in the equilibrium values of the sectoral variables in the same direction compared with the previous static equilibrium

differential information and performance measurement using a security market line an uninformed observer using the tools of mean variance and security market line analysis to measure the performance of a portfolio manager who has superior information is unlikely to be able to make any reliable inferences while some positive results of a very limited nature are possible e g when there is a riskless asset or when information is restricted to be security specific in general anything is possible in particular a manager with superior information can appear to the observer to be below or above the security market line and inside or outside of the mean variance efficient frontier and any combination of these is possible mean variance theory predicts that if we plot expected returns against beta coefficients all securities plot on a single line known as the security market line sml since fpi the beta coefficient for security i is interpreted as a measure of the riskiness of security i the market line is a graphical representation of the linear relationship between risk and return what are we to make of deviations from the sml i e of securities or managed portfolios that do not plot on such a line if we can retain our intuitive interpretation of fj as the riskiness of asset i and the market line as the appropriate expected return needed to reward agents taking on various degrees of risk then vertical deviations from the market line represent abnormal returns that differ from what is merited this paper and the companion piece dybvig and ross 10 explore in detail the validity of this intuition and the question of what sml deviations really measure the companion piece analyzes sml deviations caused by the choice of an inefficient market or reference portfolio in this paper we analyze sml deviations caused by superior performance based on superior information the intuitive explanation of deviations from the sml has motivated many

why are firms rigid a general framework and empirical tests we present a general framework for understanding why firms are slow to make major strategic changes in a wide range of empirical settings we then apply this framework to investigate more specifically the relationship between firm age and scope in hedge funds our empirical analyses demonstrate that younger hedge funds outperform older hedge funds both before and after the launch of a new fund based on our framework these results suggest that age based rigidity in hedge funds is more attributable to internal political frictions that influence project selection than to constraints associated with exchange partners or implementation costs we conclude by discussing how our framework can be used to identify the dominant source of rigidity in other contexts

global hedge funds risk return and market timing we examined the performance of 115 global equity based hedge funds with reference to their target geographical markets in the seven year period 1994 2000 several results are noteworthy first global hedge fund managers do not show positive market timing ability but do demonstrate superior security selection ability the jensen s alphas we found before and after controlling for market timing are sizable and positive second incentive fees and leverage both have a significant positive impact on a hedge fund s risk adjusted return as demonstrated by sharpe ratios and jensen s alphas but not on a fund s selectivity index i e its performance after controlling for market timing effects third incentive fees can lower the hedge fund s up market and down market systematic risk fourth the size of a hedge fund is consistently related to its return performance finally contrary to the general perception leverage does not significantly affect the systematic risk of hedge funds

hedge fund risk dynamics implications for performance appraisal accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes strategies and leverage in response to changing market conditions and arbitrage opportunities the standard measure of performance is the abnormal return defined by a hedge fund s exposure to risk factors if exposures are assumed constant when in fact they vary through time estimated abnormal returns may be incorrect we employ an optimal changepoint regression that allows risk exposures to shift and illustrate the impact on performance appraisal using a sample of live and dead funds during the period january 1994 through december 2005