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Value at Risk, GARCH Modelling and the Forecasting of Hedge Fund Return Volatility
Journal
Derivatives Use, Ttrading & Regulation
ISSN
1357-0927
ISSN-Digital
1747-4426
Type
journal article
Date Issued
2007-05-10
Author(s)
Abstract
This paper examines the conditional volatility characteristics of daily management style returns and compares the out-of-sample forecasts of different Value at Risk (VaR) approaches, namely, the normal, Cornish-Fisher (CF), and the so-called GARCH-type VaR. The examination of the conditional volatility of hedge fund styles and composite returns shows important differences concerning persistence, mean reversion and asymmetry in the period under consideration. Hedge fund returns exhibit significant negative skewness and excess kurtosis, which cannot be captured in the normal VaR whereas the CF-VaR results in a systematic downward shift of the conventional VaR. The GARCH-type VaR, however, includes the time-varying conditional volatility and is able to trace the actual return process more effectively. Since the forecast performance cannot detect which of the three VaR types can match the time-varying risk adequately, an adjusted hit ratio takes the size of the hits as well as the average VaR into account. According to this, the GARCH-type VaR outperforms the other VaRs for most of the hedge fund style indices.
Language
English
Keywords
hedge funds
Value at Risk
GARCH models
forecasting
HSG Classification
contribution to practical use / society
Refereed
No
Publisher
Palgrave Macmillan
Publisher place
Basingstoke
Volume
13
Number
1
Start page
2
End page
25
Pages
24
Subject(s)
Eprints ID
217586