Higher Co-Moment CAPM and Hedge Fund Returns

Johan Knif, Dimitrios Koutmos, Gregory Koutmos*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper uses a higher moment capital asset pricing model to characterize the returns of several types of hedge fund indices. The quantile regression approach is used to test for any possible changes in the coefficients of the model. The hypothesis that the parameters are stable across the distribution of returns is tested and rejected. The most stable coefficient is the second moment (beta) coefficient. The higher moment coefficients vary considerably. Alpha returns tend to be positive and significant at the center of the distribution. The importance of higher co-moments (i.e., co-skewness and co-kurtosis) is more prevalent at the tails of the distribution of returns suggesting that there are significant tail risks. These findings could potentially have important implications for portfolio strategies and performance evaluation.

Original languageEnglish
Peer-reviewed scientific journalAtlantic Economic Journal
Volume48
Pages (from-to)99-113
ISSN0197-4254
DOIs
Publication statusPublished - 12.04.2020
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • Hedge funds
  • Co-skewness
  • Co-kurtosis
  • CAPM
  • Quantile regression

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