Reference : Dynamic Hedge Fund Style Analysis with Errors-in-Variables
Scientific congresses and symposiums : Unpublished conference/Abstract
Business & economic sciences : Finance
Dynamic Hedge Fund Style Analysis with Errors-in-Variables
Bodson, Laurent mailto [Université de Liège - ULiège > HEC - École de gestion de l'ULiège > Gestion financière >]
Hübner, Georges [Université de Liège - ULiège > HEC - École de gestion de l'ULiège > Gestion financière >]
Coën, Alain [ > > ]
European Financial Management
[en] Style analysis ; Kalman filter ; Errors-in-variables
[en] This paper revisits the traditional return-based style analysis (RBSA) in presence of time-varying exposures and errors-in-variables (EIV). We first apply a selection algorithm using the Kalman filter to identify the more appropriate benchmarks for the analyzed fund return. Then, we compute their corresponding higher moment estimated errors-in-variables, i.e. the measurement error series introducing the (cross) moments of order three and four. We adjust the selected benchmarks by subtracting their higher moments estimated EIV from the initial return series, to obtain an estimate of the true uncontaminated benchmarks. We finally run the Kalman filter on these adjusted regressors. Analyzing EDHEC alternative indexes styles, we show that this technique improves the factor loadings and permits to identify more precisely the return sources of the considered hedge fund strategy.

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